What Is the Average Directional Index (ADX)?
The indicator uses three lines to tell both the trend direction and the trend strength. When the +DI is above the -DI, buying is stronger than selling. When -DI is above the +DI, selling is stronger than buying.
The ADX line helps determine the strength of the trend. An ADX reading above 20 (some traders use 25) indicates a trend is present and attention should be paid to the +DI and -DI to determine the direction of the trend (see above). When ADX is below 20 a trend likely isn’t present, and therefore trend traders may wish to avoid trades in the asset.
The indicator is typically calculated over 14 days, although the indicator can be used on any chart, such as a 1-minute, hourly or weekly chart. A longer period than 14 days can be used by longer-term traders to produce less trade signals.
ADX Calculation
The indicator has three lines, and each one must be calculated. The indicator is also based on True Range and Average True Range calculations – other indicators developed by Welles Wilder.
Calculate the True Range for what will eventually be our +DI and -DI lines. True range is the greatest of the following: Current High minus current Low; Current High minus previous Close (absolute value); Current Low minus previous Close (absolute value).
These values then need to be “smoothed,” typically over 14 days. Smoothing is discussed below.
Divide the smoothed +DI by the 14-day smoothed True Range to find the 14-day +DI value, which will be used as the line on the chart. Multiply by 100.
Divide the smoothed -DI by the 14-day smoothed True Range to find the 14-day -DI value, which will be used as the line on the chart. Multiply by 100.
The Directional Movement (DX) equals the absolute value of +DI minus -DI divided by the sum of +DI and – DI.
Average Directional Index (ADX) is a 14-day average of DX. All following ADX values are smoothed by multiplying the previous 14-day ADX value by 13, then adding the most recent DX value and dividing this total by 14.
Smoothing
To get the smoothed +DI and -DI values, use the following steps for each:
Sum 14 True Ranges to get TR14
Smooth it: TR14 – (TR14/14) + Current TR
For following calculations: Prior TR14 – (Prior TR14/14) + Current TR14
To get the ADX values, use the following steps:
ADX14 = 14 period Average of DX
Following ADX values = ((ADX14 x 13) + Current DX Value)/14
The indicator uses three lines to tell both the trend direction and the trend strength. When the +DI is above the -DI, buying is stronger than selling. When -DI is above the +DI, selling is stronger than buying.
The ADX line helps determine the strength of the trend. An ADX reading above 20 (some traders use 25) indicates a trend is present and attention should be paid to the +DI and -DI to determine the direction of the trend (see above). When ADX is below 20 a trend likely isn’t present, and therefore trend traders may wish to avoid trades in the asset.
The indicator is typically calculated over 14 days, although the indicator can be used on any chart, such as a 1-minute, hourly or weekly chart. A longer period than 14 days can be used by longer-term traders to produce less trade signals.
ADX Calculation
The indicator has three lines, and each one must be calculated. The indicator is also based on True Range and Average True Range calculations – other indicators developed by Welles Wilder.
Calculate the True Range for what will eventually be our +DI and -DI lines. True range is the greatest of the following: Current High minus current Low; Current High minus previous Close (absolute value); Current Low minus previous Close (absolute value).
These values then need to be “smoothed,” typically over 14 days. Smoothing is discussed below.
Divide the smoothed +DI by the 14-day smoothed True Range to find the 14-day +DI value, which will be used as the line on the chart. Multiply by 100.
Divide the smoothed -DI by the 14-day smoothed True Range to find the 14-day -DI value, which will be used as the line on the chart. Multiply by 100.
The Directional Movement (DX) equals the absolute value of +DI minus -DI divided by the sum of +DI and – DI.
Average Directional Index (ADX) is a 14-day average of DX. All following ADX values are smoothed by multiplying the previous 14-day ADX value by 13, then adding the most recent DX value and dividing this total by 14.
Smoothing
To get the smoothed +DI and -DI values, use the following steps for each:
Sum 14 True Ranges to get TR14
Smooth it: TR14 – (TR14/14) + Current TR
For following calculations: Prior TR14 – (Prior TR14/14) + Current TR14
To get the ADX values, use the following steps:
ADX14 = 14 period Average of DX
Following ADX values = ((ADX14 x 13) + Current DX Value)/14