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Average Directional Movement Index (ADX)

The Average Directional Movement Index is a technical indicator to determine a price trend (its presence specifically). It was introduced by Welles Wilder and described in his book New Concepts in Technical Trading Systems.

CUsing the simplest trading style based on the ADX, it is possible to combine two other indicators, the 14-period positive directional indicator (+DI) and the 14-period negative directional indicator (-DI). In this case, the indicator’s charts are combined. There is also another way. +DI is subtracted from –DI. In case +DI consolidates above –DI, Welles Wilder advices to go long. It is better to sell when +DI is below -DI.

Quite simple trading recommendations are supplemented by a so-called extreme point rule that is necessary for removing false signals and reducing a number of deals made. According to the extreme point method, when +DI and –DI are crossed, you should mark the extreme point. If +DI is higher than -DI, this point will be the daily crossing high. When +Di is below –DI, this point will be the daily crossing low.

Later the extreme point will be used as a market entry point. After the buy signal emerges (+DI rises above -DI), you should wait until the price breaks out the extreme before buying. Short positions should be kept open if the price doesn’t rise above the extreme point.

Calculation

ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N

where

N - the number of periods used in the calculation.

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