Average Directional Index

The average directional movement index (ADX) was developed in 1978 by J. Welles Wilder is a lagging indicator. It is an indicator of trend strength, it does not indicate the direction of strength. The ADX typically ranges between 0 to 100: the higher the oscillator, the stronger the trend is. 

  • Weak trend: ADX readings below 20
  • Strong trend: ADX reading above 40
  • Extremely strong trend: ADX reading above 50.

Key payoffs

  • Average directional index (ADX) is a short-term technical indicator that can assist you in determining the relative strength of your respective investment.
  • Further ADX analysis and advice the recent short-term volatility trend may have considerable strength. 
  • Indicators like ADX should be used in aggregation with other indicators and fundamentals.

Formula

The ADX is primarily used as an indicator of momentum, or trend strength, but the total ADX system is also used as a directional indicator.

To calculate the ADX we have to determine the + and – directional movement (DM) 

  • The +DM and -DM are found by calculating the 
  • Up-move (+DM) = current high –  previous high
  • Down-move (-DM) = current low – previous low. 

If the up-move is greater than the down-move and greater than zero, the +DM equals the up-move. Otherwise, it equals zero. 

If the down-move is greater than the up-move and greater than zero, the -DM equals the down-move; otherwise, it equals zero.

The positive directional indicator 

+DI = (100 X EMA of + DM) / average true range over a given number of time periods (ATR)

The negative direction indicator

-DI = (100 X EMA of – DM) / (ATR)

The ADX = 100 X EMA of the absolute value of (+DI minus -DI) / (+DI plus -DI)