What is the Average Directional Index (ADX)?
The Average Directional Index (ADX) is a technical analysis indicator used by some traders to determine the strength of a trend. The trend can be upward or downward, and this is illustrated by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+ DI). Therefore, ADX typically includes three separate lines. These are used to help assess whether a transaction should be taken long or short term, or whether a transaction should be taken.
Key points to remember
- Designed by Welles Wilder for daily commodity graphics, but can be used in other markets or other time frames.
- The price increases when + DI is greater than -DI and the price decreases when -DI is greater than + DI.
- Crosses between + DI and -DI are potential trade signals because bears or bulls gain the upper hand.
- The trend is strong when the ADX is above 25. The trend is weak or the price is trending when the ADX is below 20, according to Wilder.
- The non-trend does not mean that the price does not move. This may not be the case, but the price could also change trend or is too volatile for a clear direction to be present.
The formulas of the average directional index
(ADX) The indicator is
The ADX requires a calculation sequence due to the multiple lines of the indicator.
The+ DI=(ATR Smooth + DMThe)×100-DI=(ATR -DM smoothedThe)×100DX=(|+ DI+-DI||+ DI–-DI|The)×100ADX=14(ADX previous×13)+Current companyTheor:+ DM (directional movement)=Current top–PHPH=Previous top-DM=Previous weak–Current lowSmooth +/- DM=Σt=114TheDM–(14Σt=114TheDMThe)+CDMCDM=Current DMATR=Average true rangeTheThe
Calculation of the average directional motion index (ADX)
- Calculate + DM, -DM and True Range (TR) for each period. 14 periods are generally used.
- + DM = Current high – Previous high.
- -DM = Previous low – Current low.
- Use + DM when Current High – Previous High> Previous Low – Current Low. Use -DM when previous low – low current> high current – previous high.
- TR is the highest value between the high current – low current, the high current – previous closing or the low current – previous closing.
- Smooth the averages over 14 periods of + DM, -DM and TR. The TR formula is below. Insert the values -DM and + DM to calculate the smoothed averages of these.
- 14TR first = sum of the first 14 TR readings.
- Next 14TR value = First 14TR – (previous 14TR / 14) + current TR
- Then divide the smoothed value + DM by the TR smoothed value to get + DI. Multiply by 100.
- Divide the smoothed -DM value by the smoothed TR value to obtain -DI. Multiply by 100.
- The directional motion index (DX) is + DI minus -DI, divided by the sum of + DI and -DI (all absolute values). Multiply by 100.
- To obtain ADX, continue to calculate DX values for at least 14 periods. Then smooth the results to get ADX
- First ADX = sum 14 periods of DX / 14
- After that, ADX = ((previous ADX * 13) + current DX) / 14
What does the Average Directional Index (ADX) tell you?
The mean directional index (ADX) and the Negative direction indicator (-DI) and the Positive direction indicator (+ DI) are momentum indicators. ADX helps investors determine the strength of the trend while -DI and + DI help determine the direction of the trend.
The ADX identifies a strong trend when the ADX is above 25 and a weak trend when the ADX is below 20.
Line crosses -DI and + DI can be used to generate trade signals. For example, if the + DI line goes above the -DI line and the ADX is greater than 20, or ideally greater than 25, then this is a potential signal to buy.
If the -DI goes above + DI and the ADX is above 20 or 25, then this is an opportunity to enter a potential short market.
Crosses can also be used to exit pending transactions. For example, if it is long, quit when -DI goes above + DI.
When the ADX is below 20, the indicator signals that the price is trending, and therefore may not be the ideal time to enter a trade.
The difference between the average directional index (ADX) and the Aroon indicator
The ADX indicator consists of a total of three lines. the Aroon indicator is made up of two. The two indicators are similar in that they both have lines representing positive and negative movements, which helps identify the direction of the trend. The Aroon reading / level also helps determine the strength of the trend, as does the ADX. The calculations are different, however, so that crossovers on each of the indicators will occur at different times.
Limits of using the average directional index (ADX)
Crosses can occur frequently. Sometimes too often, leading to confusion and potentially money lost on transactions going quickly the other way. They are called false signals. This is more common when the ADX values are less than 25. That said, sometimes the ADX exceeds 25, but is only there temporarily and then reverses with the price.
Like any indicator, the ADX should be combined with price analysis and potentially other indicators to help filter signals and control risks.