Average Directional Index
Type
Trend indicator
Short introduction
The Average Directional Index (ADX) developed by Welles Wilder is part of the comprehensive Directional Movement Indicator (DMI) concept. The ADX, also known as the Average Directional Movement Index, is designed to determine trend strengths. The ADX is displayed in a separate chart.
Statement
The starting point for Wilder's considerations is that the current uptrend high is higher than the previous day's high and the current downtrend low is lower than the previous day's low. On the basis of this consideration, the +DI is calculated as an indicator for the upward movement and the -DI as an indicator for the downward movement. The actual DMI relates these two indicators to each other to quantify the direction of movement. Smoothing the DMI gives the ADX, which measures trend intensity. A further smoothing of the ADX results in the ADXR.
Calculation
The ADX combines the positive directional indicator (+DI) and the negative directional indicator (-DI). The combined ADX then shows smoothed results.
To calculate +/-DI, the directional movement is determined (+DM and -DM) first.
Upward trend = Daily high - Previous day's high
Downward trend = Previous day's low - Daily low
If Uptrend > Downtrend and Uptrend > 0, then +DM = Uptrend,
otherwise +DM = 0
If Downtrend > Uptrend and Downtrend > 0, then -DM = Downtrend,
otherwise -DM = 0
After selecting the period (default 14), +DI and -DI are:
+DI = 100x smoothed Moving Average of (+DM)/Average True Range
-DI = 100x smoothed Moving Average of (-DM)/Average True Range
The smoothed Moving Average is calculated on the basis of the selected periods. The Average True Range is a smoothed average of the True Range. Therefore:
ADX = 100x smoothed Moving Average of absolute value of (+DI - -DI) ÷ (+DI + -DI)
Signal = 14D period of the EMA from the ADX
The following MA variants can be used for smoothing via the parameters:
- Simple MA (SMA) – Default setting: DM
- Exponential MA (EMA) – Default setting: smoothing
- Weighted MA (WMA)
Interpretation
The +DI and -DI form the basis for the DMI. Both measure the strength of their movement, the +DI the upward strength, the -DI the downward strength. If the +DI is above the -DI, then there is an upward trend, in the opposite case, there is a downward trend. The further the two lines lie apart, the stronger the respective trend. The DMI combines the two lines, the higher its value, the stronger the trend. The DMI does not indicate whether this is an upward or downward trend.
Since the DMI is very dynamic, it is generally smoothed and presented as ADX, the interpretation is simpler and safer in this case.
Default setting
- DI period: 14
- DM smoothing method: SMA
- Signal period: 14
- Signal smoothing method: EMA
- High level: 30
- Low level: 10
Example: ADX
