The average directional movement index (ADX) was developed in 1978 by

J. Welles Wilder John Welles Wilder Jr. (June 11, 1935 – April 18, 2021) was an American mechanical engineer, turned real estate developer. He is best known, however, for his work in technical analysis. Wilder is the father of several technical indicators that ...

as an

indicator Indicator may refer to: Biology * Environmental indicator of environmental health (pressures, conditions and responses) * Ecological indicator of ecosystem health (ecological processes) * Health indicator, which is used to describe the health ...

of trend strength in a series of prices of a financial instrument. 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.

Calculations

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 a smoothed 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 and UpMove > 0, then +DM = UpMove, else +DM = 0 :if DownMove > UpMove and DownMove > 0, then -DM = DownMove, else -DM = 0 After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are: :+DI = 100 times the smoothed moving average of (+DM) divided by average true range :-DI = 100 times the smoothed moving average of (-DM) divided by average true range The smoothed moving average is calculated over the number of periods selected, and the average true range is a smoothed average of the true ranges. Then: :ADX = 100 times the smoothed moving average of the

absolute value In mathematics, the absolute value or modulus of a real number x, is the non-negative value without regard to its sign. Namely, , x, =x if is a positive number, and , x, =-x if x is negative (in which case negating x makes -x positive), an ...

of (+DI − -DI) divided by (+DI + -DI) Variations of this calculation typically involve using different types of moving averages, such as an

exponential moving average In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating a series of averages of different subsets of the full data set. It is also called a moving mean (MM) or rolling mean and is ...

, a

weighted moving average In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating a series of averages of different subsets of the full data set. It is also called a moving mean (MM) or rolling mean and is ...

or an

adaptive moving average Adaptation, in biology, is the process or trait by which organisms or population better match their environment Adaptation may also refer to: Arts * Adaptation (arts), a transfer of a work of art from one medium to another ** Film adaptation, a ...

Interpretation

The ADX does not indicate trend direction or momentum, 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 under way. ADX will range between 0 and 100. Generally, ADX readings below 20 indicate trend weakness, and readings above 40 indicate trend strength. An extremely strong trend is indicated by readings above 50. Alternative interpretations have also been proposed and accepted among technical analysts. For example it has been shown how ADX is a reliable coincident indicator of classical chart pattern development, whereby ADX readings below 20 occur just prior to pattern breakouts. The value of the ADX is proportional to the slope of the trend. The slope of the ADX line is proportional to the acceleration of the price movement (changing trend slope). If the trend is a constant slope then the ADX value tends to flatten out.

Timing

Various

market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...

methods have been devised using ADX. One of these methods is discussed by Alexander Elder in his book Trading for a Living. One of the best buy signals is when ADX turns up when below both Directional Lines and +DI is above -DI. You would sell when ADX turns back down.

References

{{technical analysis Technical indicators