AVERAGE DIRECTIONAL INDEX (ADX)
The ADX or Average Directional Index is a technical indicator used to measure the overall strength of a trend.
Developed by J. Welles Wilder, the Average Directional Index (ADX) helps traders measure how strongly price is trending and whether its momentum is increasing or falling.
It’s important to emphasize that while ADX measures the strength of a trend, it does NOT identify the trend’s direction.
It can be used to find out whether the market is ranging or starting a new trend.
The oscillator ranges between 0 and 100 with high readings indicating a strong trend and low readings indicating a weak trend. How to Calculate ADX:
The ADX is derived from two directional indicators, known as DI+ and DI-:
The positive directional indicator (+DI)
The negative directional indicator (-DI)
These two indicators are derived from the Directional Movement Index (DMI).
ADX is calculated by finding the difference between DI+ and DI-, as well as the sum of DI+ and DI-.
The difference is divided by the sum, and the resulting number multiplied by 100.
The result is known as the Directional Index or DX.
A moving average is then taken of DX, typically over a fourteen-day period (although any number of periods can be used.)
This final moving average is the ADX.