Average Directional Index
- Average Directional Index
The Average Directional Index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument. [cite book | author=Wilder, J. Welles | title=New Concepts in Technical Trading Systems | publisher=Trend Research | month=June | year=1978 | isbn=978-0894590276] ADX has become a widely-used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.
Calculation
The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with an exponential moving average.
To calculate +DI and -DI, one needs price data consisting of high, low, and closing prices each period (typically each day). One first calculates the Directional Movement (+DM and -DM):
:UpMove = Today's High − Yesterday's High:DownMove = Yesterday's Low − Today's Low:if UpMove > DownMove then +DM = Upmove else +DM = 0:if DownMove > UpMove then -DM = DownMove else -DM = 0
After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:
:+DI = exponential moving average of +DM divided by Average True Range:-DI = exponential moving average of -DM divided by Average True Range
The exponential moving average is calculated over the number of periods selected, and the average true range is an exponential average of the true ranges. Then:
:ADX = exponential moving average of (+DM − -DM)
Variations of this calculation typically involve using different types of moving averages, such as a weighted moving average or an adaptive moving average.
Interpretation
The ADX does not indicate trend direction, only trend strength. It is a lagging indicator; that is, a trend must have established itself before the ADX will generate a signal that a trend is underway. Generally, ADX readings below 20 indicate trend weakness, and readings above 40 indicate trend strength.
ee also
*Technical analysis
References
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2010.
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