Average Directional Index (ADX)

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technical_indicators:average_directional_index_adx [2019/09/07 00:22]
betseyp [Overall Downtrend with -DI Crossing above +DI]
technical_indicators:average_directional_index_adx [2023/06/05 15:15] (current)
jayanthi [What Does the Average Directional Index Tell You?]
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 ====== Average Directional Index (ADX) ====== ====== Average Directional Index (ADX) ======
  
-===== Introduction ​=====+===== What Is the Average Directional Index (ADX)? ​=====
  
 The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group of directional movement indicators that form a trading system developed by Welles Wilder. Although Wilder designed his Directional Movement System with commodities and daily prices in mind, these indicators can also be applied to stocks. ​ The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group of directional movement indicators that form a trading system developed by Welles Wilder. Although Wilder designed his Directional Movement System with commodities and daily prices in mind, these indicators can also be applied to stocks. ​
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 Wilder features the Directional Movement indicators in his 1978 book, //New Concepts in Technical Trading Systems//. This book also includes details on [[:​technical_indicators:​average_true_range_atr|Average True Range (ATR)]], the [[:​technical_indicators:​parabolic_sar|Parabolic SAR]] system and [[:​technical_indicators:​relative_strength_index_rsi|RSI]]. Despite being developed before the computer age, Wilder'​s indicators are incredibly detailed in their calculation and have stood the test of time. Wilder features the Directional Movement indicators in his 1978 book, //New Concepts in Technical Trading Systems//. This book also includes details on [[:​technical_indicators:​average_true_range_atr|Average True Range (ATR)]], the [[:​technical_indicators:​parabolic_sar|Parabolic SAR]] system and [[:​technical_indicators:​relative_strength_index_rsi|RSI]]. Despite being developed before the computer age, Wilder'​s indicators are incredibly detailed in their calculation and have stood the test of time.
  
-===== Calculation ​=====+===== How To Calculate Average Directional Index =====
  
 Directional movement is calculated by comparing the difference between two consecutive lows with the difference between their respective highs. Directional movement is calculated by comparing the difference between two consecutive lows with the difference between their respective highs.
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 The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus Directional Movement (-DM) getting the edge. The third pairing shows a big difference between the lows for a strong Minus Directional Movement (-DM). The final pairing shows an inside day, which amounts to no directional movement (zero). Both Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and revert to zero, so they cancel each other out. All inside days will have zero directional movement. The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus Directional Movement (-DM) getting the edge. The third pairing shows a big difference between the lows for a strong Minus Directional Movement (-DM). The final pairing shows an inside day, which amounts to no directional movement (zero). Both Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and revert to zero, so they cancel each other out. All inside days will have zero directional movement.
  
-==== Indicator ​Calculation ====+==== Step by Step ADX Calculation ====
  
-The calculation steps for the Average Directional Index (ADX), Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI) are based on the Plus Directional Movement (+DM) and Minus Directional Movement (-DM) values calculated above, as well as the Average True Range. Smoothed versions of +DM and -DM are divided by a smoothed version of the Average True Range to reflect the true magnitude of the move. +The calculation steps for the ADX, Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI) are based on the Plus Directional Movement (+DM) and Minus Directional Movement (-DM) values calculated above, as well as the Average True Range. Smoothed versions of +DM and -DM are divided by a smoothed version of the Average True Range to reflect the true magnitude of the move. 
  
 Note: Average True Range (ATR) is not described because there is an entire [[:​technical_indicators:​average_true_range_atr|ChartSchool article]] for this. Basically, ATR is Wilder'​s version of the two-period trading range. ​ Note: Average True Range (ATR) is not described because there is an entire [[:​technical_indicators:​average_true_range_atr|ChartSchool article]] for this. Basically, ATR is Wilder'​s version of the two-period trading range. ​
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 </​code>​ </​code>​
  
-===== Interpretation ​=====+===== Applying the Average Directional Index =====
  
 The Average Directional Index (ADX) is used to measure the strength or weakness of a trend, not the actual direction. Directional movement is defined by +DI and -DI. In general, the bulls have the edge when +DI is greater than -DI, while the bears have the edge when -DI is greater. Crosses of these directional indicators can be combined with ADX for a complete trading system. The Average Directional Index (ADX) is used to measure the strength or weakness of a trend, not the actual direction. Directional movement is defined by +DI and -DI. In general, the bulls have the edge when +DI is greater than -DI, while the bears have the edge when -DI is greater. Crosses of these directional indicators can be combined with ADX for a complete trading system.
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 The Directional Movement System indicator calculations are complex, interpretation is straightforward,​ and successful implementation takes practice. +DI and -DI crossovers are quite frequent and chartists need to filter these signals with complementary analysis. Setting an ADX requirement will reduce signals, but this uber-smoothed indicator tends to filter as many good signals as bad. In other words, chartists might consider moving ADX to the back burner and focusing on the Directional Movement Indicators (+DI and -DI) to generate signals. These crossover signals will be similar to those generated using momentum oscillators. Therefore, chartists need to look elsewhere for confirmation help. Volume-based indicators, basic trend analysis and [[:​chart_analysis:​chart_patterns|chart patterns]] can help distinguish strong crossover signals from weak crossover signals. For example, chartists can focus on +DI buy signals when the bigger trend is up and -DI sell signals when the bigger trend is down. The Directional Movement System indicator calculations are complex, interpretation is straightforward,​ and successful implementation takes practice. +DI and -DI crossovers are quite frequent and chartists need to filter these signals with complementary analysis. Setting an ADX requirement will reduce signals, but this uber-smoothed indicator tends to filter as many good signals as bad. In other words, chartists might consider moving ADX to the back burner and focusing on the Directional Movement Indicators (+DI and -DI) to generate signals. These crossover signals will be similar to those generated using momentum oscillators. Therefore, chartists need to look elsewhere for confirmation help. Volume-based indicators, basic trend analysis and [[:​chart_analysis:​chart_patterns|chart patterns]] can help distinguish strong crossover signals from weak crossover signals. For example, chartists can focus on +DI buy signals when the bigger trend is up and -DI sell signals when the bigger trend is down.
  
-===== Using with SharpCharts =====+===== Using ADX with SharpCharts =====
  
 SharpCharts users can plot these three directional movement indicators by selecting Average Directional Index (ADX) from the indicator dropdown list. By default, the ADX line will be in black, the Plus Directional Indicator (+DI) in green and the Minus Directional Indicator (-DI) in red. This makes it easy to identify directional indicator crosses. While ADX can be plotted above, below or behind the main price plot, it is recommended to plot above or below because there are three lines involved. A horizontal line can be added to help identify ADX moves. The chart example below also shows the 50-day SMA and Parabolic SAR plotted behind the price plot. The moving average is used to filter signals. Only buy signals are used when trading above the 50-day [[:​technical_indicators:​moving_averages|moving average]]. Once initiated, the Parabolic SAR can be used to set stops. [[https://​stockcharts.com/​h-sc/​ui?​s=AAPL&​p=D&​yr=0&​mn=6&​dy=0&​id=p00212055984&​listNum=30&​a=224849203|Click here]] for a live example of ADX. SharpCharts users can plot these three directional movement indicators by selecting Average Directional Index (ADX) from the indicator dropdown list. By default, the ADX line will be in black, the Plus Directional Indicator (+DI) in green and the Minus Directional Indicator (-DI) in red. This makes it easy to identify directional indicator crosses. While ADX can be plotted above, below or behind the main price plot, it is recommended to plot above or below because there are three lines involved. A horizontal line can be added to help identify ADX moves. The chart example below also shows the 50-day SMA and Parabolic SAR plotted behind the price plot. The moving average is used to filter signals. Only buy signals are used when trading above the 50-day [[:​technical_indicators:​moving_averages|moving average]]. Once initiated, the Parabolic SAR can be used to set stops. [[https://​stockcharts.com/​h-sc/​ui?​s=AAPL&​p=D&​yr=0&​mn=6&​dy=0&​id=p00212055984&​listNum=30&​a=224849203|Click here]] for a live example of ADX.
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 {{:​technical_indicators:​average_directional_index_adx:​adx-7-shch.png?​nolink&​}} {{:​technical_indicators:​average_directional_index_adx:​adx-7-shch.png?​nolink&​}}
  
-===== Suggested Scans =====+===== Suggested ​ADX Scans =====
  
 ==== Overall Uptrend with +DI Crossing above -DI ==== ==== Overall Uptrend with +DI Crossing above -DI ====