Average Directional Movement (ADX)

Average Directional Index (ADX) is an indicator used to determine the strength of a prevailing trend. Its scale measures from zero to one hundred. Low readings typically indicate a weak trend; high values typically indicate a strong trend. ADX cannot be used to determine the direction of a particular trend - only its strength. The +DI and –DI indicators will show the direction of the trend. Average Directional Index Rating (ADXR) is a plot that represents an average of the current ADX reading and an ADX value x periods ago and is intended to provide early indication of a possible directional change in ADX.

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Directional Movement (+DI and -DI)

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI).[2] The ADX combines them and smooths the result with a smoothed moving average.

To calculate +DI and −DI, one needs price data consisting of high, low, and closing prices each period (typically each day). One first calculates the directional movement (+DM and −DM):

UpMove = today's high − yesterday's high DownMove = yesterday's low − today's low if UpMove > DownMove and UpMove > 0, then +DM = UpMove, else +DM = 0 if DownMove > UpMove and DownMove > 0, then −DM = DownMove, else −DM = 0 After selecting the number of periods (Wilder used 14 days originally), +DI and −DI are:

+DI = 100 times the smoothed moving average of (+DM) divided by average true range −DI = 100 times the smoothed moving average of (−DM) divided by average true range The smoothed moving average is calculated over the number of periods selected, and the average true range is an smoothed average of the true ranges. Then:

ADX = 100 times the smoothed moving average of the absolute value of (+DI − −DI) divided by (+DI + −DI)

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Read more about ADX on Wikipedia.