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Average Directional Movement Index - ADX

Developed by J. Welles Wilder

 

This a momentum indicator used to determine the strength of a price trend; it is derived from the DMI – Directional Movement Index which has two lines.

 

+DI - Positive Directional Movement Index

–DI - Negative Directional Movement Index

 

ADX is calculated by subtracting these two values and applying a smoothing function.

Average Directional Movement Index (ADX)

 

 

The ADX is not a directional indicator but a measure of the strength of the trend which has a scale of Zero  to 100.

 

The higher the indicator value the stronger the trend.

 

A value of below 20 indicates that the market is not trending but moving in a range.

 

A value of above 20 confirms a buy or sell signal and indicates a new trend is emerging.

 

Values above 30 signifies a strong trending market.

 

When ADX turns down from above 30, it signifies that the current trend is losing momentum.

 

 

ADX combined with DMI - Directional Movement Index

 

Since the ADX alone is a directionless indicator it is combined with the DMI index to determine the direction of the currency pair.

ADX indicator combined with DMI- Directional Movement Index

DMI

 

 

ADX and DMI Index

ADX indicator and DMI Index

 

When the ADX is combined with DMI index a trader can determine the direction of the trend and then use the this indicator to determine the momentum of the prevailing trend direction.

 

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Technical Analysis


Buy Signal

A buy signal is generated when the +DI is above –DI, and the ADX is above 20

 

The Exit signal is generated when the indicator turns down from above 30.

Technical Analysis of ADX indicator- Buy Signal

Buy Signal

 

 

Sell Signal

A short signal is generated when the –DI is above +DI, and the ADX is above 20

 

The Exit signal is generated when the indicator turns down from above 30.

Technical Analysis of ADX indicator- Sell Signal

Sell Signal

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