Average Directional Movement Index
The Average Directional Movement Index (ADX) is an indicator of technical analysis and is used to determine the trend strength of a price. It was developed by Welles Wilder in 1978 and published in his book "New Concepts in Technical Trading Systems". Like all instruments of chart analysis , its informative value is controversial.
interpretation
The ADX only shows the strength of a trend and not the direction. A rising ADX indicates a trend phase and a falling ADX indicates a trendless phase. Many experts attach greater importance to the direction of movement than to its absolute height. If you take the level of the ADX into account, values above 15 generally represent a trend phase and values below a trendless phase.
Since it is an average value, it takes a long time to react to changes in the markets.
calculation
The idea behind the ADX is to compare the respective daily highs and lows on consecutive days. If the high of the current day is higher than the high of the previous day, this indicates an upward trend. In this case an upward indicator "DM-Plus" (Directional Movement-Plus) is calculated by subtracting yesterday's high price from today's price. If today's high was not higher than yesterday, DM plus is equal to zero (there is no indication of an upward trend).
Similarly, DM minus is calculated as an indicator of a downward trend by subtracting yesterday's low price from today's price. Again, the lowest value is zero.
These indicators give information about the absolute movement of the course. For a comparison of the values of different courses, however, normalization is required. For this purpose, the directional movement indicator is divided by the "true range". The true range is either the fluctuation of the current day (high price - low price) or the change in today's high or low price compared to yesterday's closing price, depending on which of these values is highest. This normalization brings us to the two direction indicators DI plus and DI minus.
The Directional Movement Index (DX) is now determined to calculate the ADX . This indicator is determined by dividing the difference between DI plus and DI minus by the sum of the values DI plus and DI minus.
The ADX is then the moving average of the DX. For the moving average, it is necessary to define a period over which the average is formed. Here, 14 or 18 days are often chosen.
literature
- J. Welles Wilder: New Concepts in Technical Trading Systems . Trend Research, Greensboro 1978, ISBN 978-0-89459-027-6 (English).