Friday, March 29, 2024

Average Directional Index (ADX)

by Hideo Nakamura
Average Directional Index (ADX)

Average Directional Index (ADX)

The Average Directional Index (ADX) is a technical indicator used in the analysis of financial markets. It was developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems. ADX measures the strength of a trend, not its direction – it does not indicate whether prices are trending up or down.

The ADX calculation uses three other indicators to determine how strong a trend is:

1. The +DI line shows the strength of an uptrend, while the –DI line indicates the strength of a downtrend; these two lines are derived from price movements over time and fluctuate between 0 and 100, with readings above 25 indicating an emerging trend while readings below 20 suggest that market movement is flat or non-trending.

2. The ADX line itself oscillates between 0 and 100; when this reading reaches 40 or higher, it signals that there is strong directional movement underway and that trading opportunities may exist within the current market environment.

3. Finally, Wilder also suggested using a smoothing average for each DI line as well as for the overall ADX value; this helps reduce volatility associated with extreme spikes in single data points but still allows traders to identify developing trends more quickly than if they were relying solely on raw data points without any smoothing applied to them first..

Overall then, traders can use ADX to gauge whether there’s enough momentum behind price action to confirm an existing trend or signal potential reversals or new trends forming before deciding on their next course of action regarding positions taken within those markets being analyzed via this toolset

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