Average Directional Index (ADX)

What Is an Average Directional Index (ADX)? The Average Directional Index, or ADX, is a tool for determining the comprehensive strength of a trend. It is based on the idea that trading, when the market is moving in the direction of a strong trend, increases the chances of profit and lowers the risk by a considerable margin.  Welles Wilder invented the ADX indicator for daily commodity charts, but it is currently used by technical traders and financial experts in a wide range of markets to identify the strength of trends. Average Directional Movement Index (ADX) is termed as a non-directional indicator that measures trend strength, regardless of whether prices are going up or down. The Directional Movement System, which includes the DMI+ and DMI- indicators as well as the ADX, seeks to assess the strength of price movement in both positive and negative directions. A single line represents ADX with readings ranging from 0 to 100. The indicator is (mostly) exhibited in the same window as the two directional movement indicator (DMI) lines, which are used to calculate ADX. The general interpretation of the values is as follows: How to Calculate the Average Directional Index (ADX) Please follow the following steps to calculate the value of Average Directional Index (ADX) indicator: 1. Calculate Directional Movement (+DM) using the formula: +DM = Current High – Previous High 2. Calculate -DM using: -DM = Previous Low – Current Low 3. Now choose between +DM and -DM by selecting the one with a higher value. 4. Calculate the True Range (TR) by using either of the following: Current high – Current low; Current low – Previous close; Current high – Previous close 5. Calculate the smoothed 14-period averages of the TR, the +DM, and –DM by using: First 14TR = Sum of first 14 TR readings Next 14TR = first 14TR – (prior 14TR/14) + current TR 6. Now calculate the +DI and -DM values by using: +DI = (Smoothed +DM / ATR) x 100  -DI = (Smoothed -DM / ATR) x 100 7. Now you can calculate the directional movement index (DMI) by using the following equation: DX = ( | +DI – -DI |  / | +DI + -DI | ) x 100   8. To calculate ADX you have to determine the DX for all 14 periods, and to calculate the first ADX, you should divide the sum of all 14 periods of DX by 14. For the remaining 13, use the following formula: ADX = (Previous ADX x 13) + Current ADX) / 14 Note: The entire process is automated during trading, so you don’t need to perform each of the calculations above yourself.  Other popular trading indicators include on-balance volume (OBV), accumulation/distribution line, MACD and RSI.