Average Directional Index – ADX
A group of Directional Indicators – Average Directional Index (ADX), Minus Directional Indicator (-DX) and Plus Directional Indicators (+DX) – were developed by Welles Wilder for the commodities but are also used by investors for analyzing stocks.
KEY TAKEAWAYS
- Designed by Welles Wilder for commodity daily charts, but can be used in other markets or other timeframes.
- The price is moving up when +DI is above -DI, and the price is moving down when -DI is above +DI.
- Crosses between +DI and -DI are potential trading signals as bears or bulls gain the upper hand.
- The trend has strength when ADX is above 25. The trend is weak or the price is trendless when ADX is below 20, according to Wilder.
- Non-trending doesn’t mean the price isn’t moving. It may not be, but the price could also be making a trend change or is too volatile for a clear direction to be present.
Final Thoughts
The Directional Movement System indicator calculations are complex, interpretation is straightforward, and successful implementation takes practice. +DI and -DI crossovers are quite frequent and chartists need to filter these signals with complementary analysis.