Average Directional Index

The ADX, developed by Welles Wilder, measures the strength of a prevailing trend, and determines whether there is a movement or direction in the market. A strong trend is indicated by a rising ADX, whereas a non-trending market is marked by a falling ADX. Note that the ADX does not suggest whether a trend is up or down.

 

The ADX can be employed to determine sideways (non-trending) markets, which offer less capital than trending markets, to filter out trades during a market’s non-trending period, and to indicate the beginning of an upswing in movement.

 

Investors also employ the ADX to confirm the signals from other indicators or filter out indicators that they might use to analyze either trending or non-trending markets.

 

The ADX considers every possible configuration that could occur between two days of trading relative to the Directional Movement Index. The largest part of today’s high or low that is outside of yesterday’s high or low range is calculated. If the largest part of today’s range is above yesterday’s, then the value is marked as PDI, while the largest part of today’s range below yesterday’s yields a value denoted as MDI. The range increment is today’s True Range. The Directional Movement is divided by the True Range in order to make directional movement relative to true range.

 

Pane: Bottom

 

Formula

 

Calculating the ADI involves two steps. First of all, the difference of PDI and MDI is divided by the sum of PDI and MDI, and the quotient is multiplied by 100. The term for the result is symbolized as DX. Next, the ADI is calculated by taking the modified Moving Average of DX.

 

DX = 100 * ((PDI - MDI) / (PDI + MDI))

 

ADI = modified Moving Average of DX

PDI = Current Plus Directional Movement

DX = Current DX

MDI = Current Minus Directional Movement

 

Properties

 

High: The Symbol field on which the study will be calculated. The application uses the Aspect "High".

 

Low: The Symbol field on which the study will be calculated. The application uses the Aspect "Low".

 

Close: The Symbol field on which the study will be calculated. The application uses the Aspect "Close".

 

Period. The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. Workstation uses a default period of 14 for the Average Directional Index. Note that if you are simultaneously using the Directional Movement Index, you may set both period parameters at identical levels.

 

Interpretation

 

An ADX line usually ranges from below 20 to above 40. A line that has fallen below 20 suggests a non-trending market with low volatility, while a line that suddenly breaks out above 20 may suggest the beginning of an important trend. When an ADX line is well above 40 and begins to fall, it usually indicates a trend that is slowing down.

 

Literature