Average Directional Index

Average Directional Index

The Average Directional Index, or ADX, was developed by J. Welles Wilder Jr. in 1978 to measure the strength of the current trend. It is derived from two other indicators, the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI).  The ADX is calculated by dividing the difference of DI+ and DI- by the sum of DI+ and DI-. The quotient is then multiplied by 100, where the product is smooth with an exponential moving average.

ADX is one of the lagging indicators wherein a trend must establish first before the ADX will generate a signal. Similar to RSI, it is a banded oscillator that fluctuates between 0 and 100. A reading below 20 denotes a weak trend while a high reading above the 40 level indicates a strong trend.  On one hand, it doesn’t necessarily mean that a reading above 40 will generate a bull or bear signal, it only measures on how strong or weak the uptrend and downtrend are rather than its direction.

ADX also determines changes in the market from trending to trading (moving sideways) or vice versa. A rise from below 20 to above 20 signals the trading range is ending and trend may be developing, while a fall from above 40 to below 40 shows a potential change from trending to trading. See example below.

Example

Soybean Oil – Electronic

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13 Responses to Average Directional Index

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    SuperSonic

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