ADX

Overview

The Average Directional Movement Index (ADX) is a momentum indicator developed by J. Welles Wilder and described in his book "New Concepts In Technical Trading Systems", written in 1978. The ADX is constructed from two other Wilders' indicators: the Positive Directional indicator (+DI) and the Negative Directional Indicator (-DI). The +DI and -DI indicators are commonly referred to as the Directional Movement Index. Combining the +/-DI and applying a Wilders() smoothing filter results in the final ADX value.

Interpretation

The ADX's main purpose is to measure the strength of market trends on a 0-100 scale; the higher the ADX value the stronger the trend. It should be noted that while the direction of price is important to the ADX's calculation, the ADX itself is not a directional indicator. Values above 40 indicate very strong trending while values below 20 indicate non-trending or ranging market conditions.

Traders typically use the ADX as a filter along with other indicators to create a more concrete trading methodoly. Many traders view ADX turning up from below 20 as an early signal of a new emerging trend while, conversely, a declining ADX turning down from above 40 as deterioration of the current trend. Wilder suggests using the ADX as part of a system that includes the +DI and -DI indicators. (See the Directional Movement System indicator for additional details)

Implementation

Users can define the DMI Periods and the ADX Smoothing Periods to allow for full customization of the ADX indicator. Often times these values will be the set the same, but users are encouraged to experiment with a variety of their own combinations of values. A horizontal reference line is displayed at the +20 level.

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