The ADX, or Average Directional Index, is a technique for measuring the overall strength of a trend. It is based on the concept that trading, when the market is moving in the direction of a strong trend, enhances the possibilities of profit while decreasing the risk significantly.
The ADX indicator was innovated by Welles Wilder for daily commodities charts, but it is now used to assess the strength of trends by technical traders and financial professionals in a wide range of markets.
The Average Directional Movement Index (ADX) is a non-directional indicator that assesses the strength of a trend regardless of whether prices are rising or falling. The Directional Movement System, which consists of the DMI+ and DMI- indicators as well as the ADX, attempts to measure the strength of price movement in both positive and negative directions. ADX is represented by a single line with measurements ranging from 0 to 100. The indicator is (usually) shown in the same window as the ADX-calculating two-directional movement indicator (DMI) lines.
To determine the value of the Average Directional Index (ADX) indicator, please follow the instructions below:
1. Use the following formula to calculate Directional Movement (+DM):
+DM = Previous High - Current High
2. Determine -DM using the formula: -DM = Previous Low - Current Low
3. Now, pick between +DM and -DM by selecting the larger value.
4. Determine the True Range (TR) using one of the following methods:
Current high minus current low; current low minus previous close; current high minus previous close
5. Determine the smoothed 14-period averages of the TR, +DM, and –DM using the formula: First 14TR = Sum of first 14 TR readings
Next 14TR = (previous 14TR/14) + current TR
6. The +DI and -DM values are now calculated as follows: +DI = (Smoothed +DM / ATR) x 100 -DI = (Smoothed -DM / ATR) x 100
7. The directional movement index (DMI) may now be calculated using the following equation:
DX = (| +DI - -DI | / | +DI + -DI |) multiplied by 100.
8. To compute ADX, you must first determine the DX for all 14 times, and then divide the sum of all 14 periods of DX by 14. Use the following formula for the remaining 13:
ADX = (Previous ADX multiplied by 13) + Current ADX / 14
During trading, the entire procedure is automated, so you do not need to complete each of the calculations above manually. On-balance volume (OBV), accumulation/distribution line, MACD, and RSI are some more prominent trading indicators.