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Average Directional Movement Index - ADX
Introduction
Average Directional Movement Index Technical Indicator (ADX) helps to determine
if there is a price trend. It was developed and described in detail by Welles Wilder
in his book "New concepts in technical trading systems".
We represent the indicator in a separate chart bellow the price chart. It consists
of three lines: blue - the ADX value, green - Positive
Directional Indicator and
a red line - Negative Directional Indicator. The simplest trading method based on
the system of directional movement implies comparison of two direction indicators:
the 14-period +DI one and the 14-period -DI. To do this, one either puts the charts
of indicators one on top of the other, or +DI is subtracted from -DI. W. Wilder
recommends buying when +DI is higher than -DI, and selling when +DI sinks lower
than -DI. To these simple commercial rules Wells Wilder added "a rule of points
of extremum". It is used to eliminate false signals and decrease the number of deals.
According to the principle of points of extremum, the "point of extremum" is the
point when +DI and -DI cross each other. If +DI raises higher than -DI, this point
will be the maximum price of the day when they cross. If +DI is lower than -DI,
this point will be the minimum price of the day they cross. The point of extremum
is used then as the market entry level. Thus, after the signal to buy (+DI is higher
than -DI) one must wait till the price has exceeded the point of extremum, and only
then buy. However, if the price fails to exceed the level of the point of extremum,
one should retain the short position.
Calculation
To calculate the AD value, we have to calculate first Positive
Directional Indicator (+DI) and
Negative Directional Indicator (-DI). After that, we smooth the relative difference between them.
ADX = MA[(+DI-(-DI))/(+DI+(-DI)), n]
Where:
MA - Moving Averages
+DI - Positive Directional Indicator
-DI - Negative Directional Indicator
n - the time period of MA for smoothing the ADX
Parameters
Logic - from this dropdown box we chose the logic of using of the indicator. The possible logics are:
- The ADX value is rising.
We have a signal buy when the current bar value of ADX is higher than the previous bar value. A signal sell appears when the current bar value of ADX is lower than the previous bar value. - The ADX value is falling.
We have a signal buy when the current bar value of ADX is lower than the previous bar value. A signal sell appears when the current bar value of ADX is higher than the previous bar value. - The ADX value is greater than Level.
We have a signal buy when the current bar value of ADX is higher than the specified Level value. A signal sell appears when the current bar value of ADX is lower than the specified Level value. - The ADX value is lower than Level.
We have a signal buy when the current bar value of ADX is lower than the specified Level value. A signal sell appears when the current bar value of ADX is higher than the specified Level value. - The ADX value crosses the Level line from below.
We have a signal buy when the current bar value of ADX is higher than the specified Level value and the previous ADX value is lower than the Level value. A signal sell appears when the current bar value of ADX is lower than the specified Level value and the previous ADX value is higher than the Level value. - The ADX value crosses the Level line from above.
We have a signal buy when the current bar value of ADX is lower than the specified Level value and the previous ADX value is higher than the Level value. A signal sell appears when the current bar value of ADX is higher than the specified Level value and the previous ADX value is lower than the Level value. - The ADX value changes from downward to upward.
We have a signal buy when the current bar value of ADX is higher than the previous bar value and the previous ADX value is lower than the ADX value of the bar before the previous one. A signal sell appears when the current bar value of ADX is lower than the previous bar value and the previous ADX value is higher than the ADX value of the bar before the previous one. - The ADX value changes from upward to downward.
We have a signal buy when the current bar value of ADX is lower than the previous bar value and the previous ADX value is higher than the ADX value of the bar before the previous one. A signal sell appears when the current bar value of ADX is higher than the previous bar value and the previous ADX value is lower than the ADX value of the bar before the previous one.
Method - During the calculating of the Accelerator Oscillator, the Forex Strategy Builder uses Moving Averages to smooth the values. From here we can chose the calculation method of the MA.
- Simple - Simple Moving Average.
- Weighted - Weighted Moving Average.
- Exponential - Exponential Moving Average.
- Smoothed - Smoothed Moving Average.
Use previous bar value - when we open a position on price different than Price Close or Day Close, we have to mark this check box. This guarantees us that at the time of opening we use the correct indicator's value.
Period - the period of moving average for calculating the Directional Indicators and ADX.
Level - we chose a value here when it is needed from the Logic.
Default parameters
- Logic - The ADX value is rising
- Method - Exponential
- Price - Median
- Period - 14
- Level - 0.0000
Usage
We can use the ADX as an Open or a Close Filter. Like an Open Filter, depending of the Logic, it allows the opening of a long or short position. When we use it as a Close Filter, when the Logic's conditions are satisfied it forces the closing of the current position.