Average Directional Movement (ADX)
Overview
The Average Directional Movement Index (ADX) is a momentum indicator developed by
J. Welles Wilder and described in his book “New Concepts In Technical Trading Systems”,
written in 1978. The ADX is constructed from two other Wilders’ indicators: the
Positive Directional indicator (+DI) and the Negative Directional Indicator (-DI).
The +DI and -DI indicators are commonly referred to as the Directional Movement Index.
Combining the +/-DI and applying a Wilders() smoothing filter results in the final ADX value.
Interpretation
The ADX’s main purpose is to measure the strength of market trends on a 0-100 scale;
the higher the ADX value the stronger the trend. It should be noted that while the direction of price
is important to the ADX’s calculation, the ADX itself is not a directional indicator.
Values above 40 indicate very strong trending while values below 20 indicate non-trending or
ranging market conditions.
Traders typically use the ADX as a filter along with other indicators to create a more
concrete trading methodoly. Many traders view ADX turning up from below 20 as an early
signal of a new emerging trend while, conversely, a declining ADX turning down from
above 40 as deterioration of the current trend. Wilder suggests using the ADX as part of a
system that includes the +DI and -DI indicators.
The materials presented on this website are solely for informational purposes and are not
intended as investment or trading advice.
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