Average Directional Index
How the Average Directional Index Indicator works
This tool yields signals by calculating the Plus Directional Indicator and the Minus Directional Indicator.
Trend strength can be determined by observing:
- ADX rise which implies that market trend is getting stronger
- ADX fall, which indicates that the trend is unstable.
Moreover, a more complex ADX trading system can generate:
- A buy signal if Plus Directional Indicator (+DI) or the green line goes above the Minus Directional Indicator (-DI) or the red line
- A sell signal if Minus Directional Indicator or red line goes above Positive Directional Indicator or green line.
ADX Trading Strategy
This trading strategy’s goal is to determine the most influential trends as well as to differentiate conditions that are trending and non-trending.
Through ADX, a strong trend is detected as the reading yields more than 25, while weak trends are shown for below 25 ADX reading.
A falling ADX line is misconstrued to be a signal for a reversal of trend, when in fact, it only shows that a strong trend is starting to weaken. As long as the ADX line does not go below the benchmark point, which is at 25, the falling line only signifies a weakening trend.
The positive Directional movement (+DI) is determined by finding the difference between the highest price of the previous trading day and the current highest price. For the Negative Directional movement (-DI), compare the lowest amount of the last day to that of the lowest price of the present day and get its difference. After such, the directional movement’s average is computed.
ADX = MA [((+DI) – (-DI))] x 100;
+DI – Plus Directional Indicator
-DI – Negative Directional Indicator.