Average Directional Movement Index (ADX)
Average Directional Movement Index (ADX) was developed and described in detail by Welles Wilder in his book "New concepts in technical trading systems". Average Directional Movement Index (ADX) shows if there is a trend on the market and what potential it has.
ADX represents two opposite +/-DM and ADX lines:
The first goes in the direction of the price movement (+DM).
The second goes in the opposite direction (-DM).
The third (ADX) is the absolute difference between +/-DM lines, so the more divergence between +/-DM lines, the greater the value of ADX.
Average Directional Movement Index (ADX) signals (table shown below):
- Intersection with the extremum lines or reversal at high-low.
- +DM and -DM lines intersection precedes a new trend or strengthens the prevailing one - it is a very strong signal.
- If +DM line is above -DM line, then the trend is bullish, and vice versa.
- If lines diverge then the ADX value increases and the trend becomes stronger, and vice versa.
- If the ADX is below 20, then the trend is very weak.
| ADX | Trend | +DM . /. . -DM | Buy/Sell |
|---|---|---|---|
| Very low | Weak | - | |
| Falling | Loses strength | - | |
| Rises | Becomes stronger | Higher Lower | Buy Sell |
| Forms local low | A new one | Higher Lower | Buy Sell |
| Very high | Chances for a reversal are great | Take profit on some open positions | |
| Forms local high | Market is overbought / oversold |
