Notices

Average Directional Index

From Traderpedia

Definition:
An indicator designed to signal market's trendiness.


Contents

[edit] Introduction

The Average Directional Index (ADX) was developed by J. Welles Wilder in order to measure the strength of the current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on what mood the market is in.

[edit] Application

ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI). They are often plotted together.

+DI measures the force of the up moves and -DI measures the force of the down moves over a set period.

In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Be careful, though; when a security is in a trading range, this system may produce many whipsaws. As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.

ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 30 or 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend. Readings below 20 a weak trend.

To catch a trend in its early stages, you might look for securities with an ADX that advances above 20. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range may develop.

[edit] Chart

[edit] See also