Pathshala: ADX Average Directional Index

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ADX Average Directional Index<span style="font-family: "arial" , "helvetica" , sans-serif;"> </span></h1>
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<span style="font-family: "arial" , "sans-serif"; font-size: 11.0pt; line-height: 115%;">The <b>average directional movement index</b> (<b>A.D.X.</b>) </span><span style="font-family: "arial" , "sans-serif"; font-size: 11.0pt; line-height: 115%;"><span style="font-family: "arial" , "helvetica" , sans-serif;">is a combination of <b>two other indicators</b></span><b> (</b></span><span style="font-family: "arial" , "sans-serif"; font-size: 11.0pt; line-height: 115%;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>The positive directional indicator (abbreviated +DI) and negative 
directional indicator (-DI)</b> </span>was
developed in 1978 by J. Welles Wilder</span><span style="font-family: "calibri" , "sans-serif"; font-size: 11.0pt; line-height: 115%;">.  <span style="mso-spacerun: yes;"><br /></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">The Average Directional Movement Index (ADX) technical analysis indicator 
describes when a market is trending or not trending. When combined with the DMI+ 
plus and DMI- minus (see: DMI) the ADX can generate buy 
and sell signals. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">However, the <b>main purpose of the ADX is to determine whether a 
      stock, future, or currency pair is trending or is in a trading range</b>.
 
      Determining which mode a market is in is helpful because it can 
guide a trader  to which other technical analysis indicators to use.</span><br />
<h3 style="text-align: left;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span class="mw-headline" id="Calculations">Calculations</span></span></h3>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "sans-serif"; font-size: 11.0pt; line-height: 115%;">The <b>average directional movement index</b> (<b>A.D.X.</b>)</span><span style="font-family: "arial" , "sans-serif"; font-size: 11.0pt; line-height: 115%;"><span style="font-family: "arial" , "helvetica" , sans-serif;">is a combination of two other indicators<span style="font-family: "arial" , "sans-serif";"> </span></span></span>the positive directional indicator (abbreviated +DI) and negative 
directional indicator (-DI). The A.D.X. combines them and smooths the result with a smoothed moving average.</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">
</span><span style="font-family: "arial" , "helvetica" , sans-serif;">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):</span><br />
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</span>
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<dl><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">UpMove = today's high − yesterday's high</span></dd><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">DownMove = yesterday's low − today's low</span></dd><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">if UpMove > DownMove and UpMove > 0, then +DM = UpMove, else +DM = 0</span></dd><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">if DownMove > UpMove and DownMove > 0, then −DM = DownMove, else −DM = 0</span></dd></dl>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
</span><span style="font-family: "arial" , "helvetica" , sans-serif;">After selecting the number of periods (Wilder used 14 days originally), +DI and −DI are:</span><br />
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</span>
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<dl><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">+DI = 100 times the smoothed moving average of (+DM) divided by average true range</span></dd><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">−DI = 100 times the smoothed moving average of (−DM) divided by average true range</span></dd></dl>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
</span><span style="font-family: "arial" , "helvetica" , sans-serif;">The smoothed moving average is calculated over the number of periods 
selected, and the average true range is a smoothed average of the true 
ranges. Then:</span><br />
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</span>
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<dl><dd><span style="font-family: "arial" , "helvetica" , sans-serif;">A.D.X. = 100 times the smoothed moving average of the absolute value of (+DI − −DI) divided by (+DI + −DI)</span></dd></dl>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
</span><span style="font-family: "arial" , "helvetica" , sans-serif;">Variations of this calculation typically involve using different types of moving averages, such as an exponential moving average, a weighted moving average or an adaptive moving average.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUryppNc5y-RDSBK22g6XYNno4E-pJ6GkSTng-XJ7cljJKCwJ0TONoVtAE-b51DPsK1dMwosG7UKv_R5wkce2Pnug87WGM6Vub33zLEktrloZ1z8qdnoLFWkb9B3Jz1d37kdkFuWlZMLQ/s1600/ADX.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" class="zcmoivxtrfydgaadpgoy xafisjghxwanfiewrtgi" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUryppNc5y-RDSBK22g6XYNno4E-pJ6GkSTng-XJ7cljJKCwJ0TONoVtAE-b51DPsK1dMwosG7UKv_R5wkce2Pnug87WGM6Vub33zLEktrloZ1z8qdnoLFWkb9B3Jz1d37kdkFuWlZMLQ/s1600/ADX.jpg" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The chart contract below shows an 
excellent example of the ADX in action:</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9IbcG0E0_Ya012CHssAXSNkn0qufnvQ_EaoSBpOx5H-xkeJTBKNTOkVd1u7_z78lFCDMeeTr2SlHbGqJQEu_BEk_Wf3ZkW8tkpweUsR7enIwEWRbXvgiKTGVeJeo33mQcSWM9btKfC5w/s1600/ADX+1.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9IbcG0E0_Ya012CHssAXSNkn0qufnvQ_EaoSBpOx5H-xkeJTBKNTOkVd1u7_z78lFCDMeeTr2SlHbGqJQEu_BEk_Wf3ZkW8tkpweUsR7enIwEWRbXvgiKTGVeJeo33mQcSWM9btKfC5w/s1600/ADX+1.gif" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">ADX Shows Trend Strength</span></h3>
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    </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The first concept to remember is that <b>the direction that the ADX moves doesn't 
      depend upon the direction of the underlying stock</b>. <b>All 
        the ADX shows is the trend strength</b>. </span></div>
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<ol style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Strong upward trend</b> of stock = <b>Increasing ADX</b></span> </li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;"><b>Strong downward trend</b> = <b>Increasing ADX</b></span> </li>
</ol>
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<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">As can be referenced from the chart of the E-mini Russell 2000 Index Futures 
      contract above, when the e-mini future was rising in a strong upward trend, the 
      ADX indicator was rising.</span></div>
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    </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">When the e-mini futures contract moved into a non-directional consolidation 
      phase, the ADX decreased.</span></div>
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<h3 style="text-align: left;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">ADX is a Great Complement to Other Technical Indicators </span></h3>
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    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The ADX is so popular because determining whether a stock, commodity, or 
      currency market is trending or not trending can help a trader avoid the pitfalls 
      of some indicators.</span></div>
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    </span><br />
<h3 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Moving Averages</span></h3>
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    </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Moving averages and 
        their variants are <b>effective during trending markets</b>; however, during 
        consolidation periods when prices go up and down, but in no direction, moving 
        average indicators have a tendency to give numerous false buy and sell signals 
        that add up to  trading losses. During trending markets, use moving averages, trend-lines, and other trend following technical indicators.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Oscillators</span></h3>
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    </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"> Oscillators are extremely <b>effective in non-trending 
        markets</b>. Buying low and selling high is accomplished quite readily with 
        oscillators. Unfortunately, during trending markets, oscillators perform quite 
        poorly, often selling short during a bull market run or buying during a bear 
        market downtrend, adding up to large losses. For periods of non-trending, use oscillators like Stochastic Fast & Slow, RSI, or Williams %R and other range-bound indicators like Bollinger Bands or Moving Average Envelopes.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">
    The importance of the 20-level and 40-level, along with more examples of the 
    ADX in action,</span></div>
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<h3>
Interpreting the ADX</h3>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">It is important to re-emphasize that the direction of price doesn't affect 
the ADX; it is the strength of the stock, futures, or currency's trend that 
matters. </span></div>
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    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Below, we see the contract chart , but here the 
      e-mini future is in a downtrend, a strong downtrend. Note that the ADX is rising 
      even though the price of the contact is falling.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfCTNzd_uSorI9oaQh2VjeACWHz388prI0BS0ssp381426XsumTTYCpFlHkyLZYEdZDmKVtXsLXGlBo22EYIlM7RYajLDD85NX25HgAwWc5PbIxAbNyZ8V4PQL-A-9zPkx0zFD4MTcIJ8/s1600/ADX+2.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfCTNzd_uSorI9oaQh2VjeACWHz388prI0BS0ssp381426XsumTTYCpFlHkyLZYEdZDmKVtXsLXGlBo22EYIlM7RYajLDD85NX25HgAwWc5PbIxAbNyZ8V4PQL-A-9zPkx0zFD4MTcIJ8/s1600/ADX+2.gif" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="font-size: 18.0pt; mso-bidi-font-family: "Times New Roman";">Interpreting the ADX</span></b></span></h4>
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<ul type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Below 20</span></b><span style="mso-bidi-font-family: "Times New Roman";">: Non-trending market. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Crosses above 20</span></b><span style="mso-bidi-font-family: "Times New Roman";">: Signal that a trend might be emerging; consider
     initiating buy or sell short in direction of prevailing stock, future, or
     currency price movement. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Between 20 & 40</span></b><span style="mso-bidi-font-family: "Times New Roman";">: If ADX is increasing between 20 and 40, then it is
     further confirmation of emerging trend. Buy or shortsell in the direction
     of the current market direction. Avoid using oscillator technical
     indicators and use trend following indicators like <span style="color: blue;">moving averages</span>. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Above 40</span></b><span style="mso-bidi-font-family: "Times New Roman";">: Very strong trend. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Crosses above 50</span></b><span style="mso-bidi-font-family: "Times New Roman";">: Extremely strong trend. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="mso-bidi-font-family: "Times New Roman";">Crosses above 70</span></b><span style="mso-bidi-font-family: "Times New Roman";">: "Power Trend"; very rare occurence </span></span></li>
</ul>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">In his book, <i>New Concepts in
Technical Trading Concepts</i>, Welles Wilder, Jr., the creator of the ADX also
created the DMI+ and DMI- indicators to generate buy and sell signals
specifically for the ADX technical analysis indicator. In fact the ADX is
derived from the DMI+ and DMI- calculations (see: <span style="color: blue;">DMI</span>).</span></span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-size: small;"><b style="mso-bidi-font-weight: normal;"><u><span style="line-height: 115%;">Sum  </span></u></b><b><u>Example</u></b><b style="mso-bidi-font-weight: normal;"><u><span style="line-height: 115%;"> with ADX</span></u></b></span></span></div>
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<b><span style="font-family: "arial" , "sans-serif";">Trending
Stocks </span></b><span style="font-family: "arial" , "sans-serif";">: ADX works on
absolute value. As long as the value is above 25, it is considered as uptrend.
Some of the novice trader gets confused when the value falls. Even if ADX falls
to above 25 from a higher value, it is considered as trending but it signifies
that the trend is weakening and time to get alerted. </span></div>
<h4>
<span style="font-family: "arial" , "sans-serif";">Example of Trading
Strategies Used With ADX Shown In Axis Bank Chart</span></h4>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUjQuhgcAfGxCi2yhyphenhyphenHuEXxm_AZtZev9bnd2G1zWwcoJ4uyOqdUom8RMwQE4Js9ChGBo0wKQVh80-XtZd2O47tUNaMVYD0WF5NzPUpbf0zuYVwvgPwtp3aIPM9nAM1-hoDnybUCdYXxys/s1600/1+ADX.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="414" data-original-width="749" height="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUjQuhgcAfGxCi2yhyphenhyphenHuEXxm_AZtZev9bnd2G1zWwcoJ4uyOqdUom8RMwQE4Js9ChGBo0wKQVh80-XtZd2O47tUNaMVYD0WF5NzPUpbf0zuYVwvgPwtp3aIPM9nAM1-hoDnybUCdYXxys/s640/1+ADX.png" width="640" /></a></div>
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<b><span style="font-family: "arial" , "sans-serif";">Strong Trend</span></b><span style="font-family: "arial" , "sans-serif";">: An increase in ADX value of above
25, means that trend is getting stronger and and provides better confidence to
the trader.<br />
<br />
<b>Divergence</b>: As mentioned earlier, divergence in ADX does not predict
fall in price. As long as the value stays above 25, the trend is intact.<br />
<br />
<b>Change of Trend </b>: ADX crossing below 25 signifies end of trend or
movement in no trade zone. <br />
<br />
<b>Non-trending</b>: ADX between 0 to 25 refers to a non trending zone.<br />
<br />
<b>Trade with Trailing Stop Loss</b>: Since it indicates about the continuation
trend only and not the ultimate target, it can best be traded with trailing
stop loss or partial profit booking.<br />
<br />
<b>Directional Movement</b>: While ADX provides information only about the
strength of the trend, it is normally supplemented with Directional Index +DI
and -DI. They indicates direction of the trend. Their interpretation is as
follows:<br />
1.When +DI is above -DI then trend is up trend.<br />
2.When -DI is above +DI then trend is downwards.<br />
3.+DI crossing over -DI signals bullish trend and vice verse. </span><br />
<h4>
<span style="font-family: "arial" , "sans-serif";">Example of Directional
Movement(+DI and -DI) Used With ADX Shown In SBIN Chart</span></h4>
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<b></b></div>
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<b>Weakness</b> <br />
1.ADX is based on Moving Averages. Therefore it is slow to react or in other
words it is lagging indicator.<br />
2.ADX may not provide signals for slow moving stocks.<br />
3.Crossover of +DI and -DI some times can happen too frequently, thereby giving
many false signals. <br />
4.As with other indicators, use ADX when other indicators of your reliance are
supporting them. </div>
<h4>
Example of Too Many Crossover of +DI and -DI as Shown In Boeing Co Chart</h4>
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Example of Too Many Crossover of +DI and -DI as Shown Axis Bank Chart</h4>
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ADX Average Directional Index 24. ADX Average Directional Index

ADX Average Directional Index The average directional movement index ( A.D.X. ) is a combination of two other indicators ( The positi...