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Average Directional Movement Index (ADX)

Developed by J. Welles Wilder

 

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

 

+DI- Positive Directional indicator

–DI - Negative Directional Indicator

 

ADX is calculated by subtracting these two values and applying a smoothing function, example a function of ten to come up with a 10 period ADX.

Average Directional Movement Index (ADX)

ADX

 

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

 

The higher the ADX value the stronger the trend.

 

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

 

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

 

ADX value above 30 signifies a strong trending market.

 

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

 

 

ADX indicator 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 indicator and DMI Index

 

ADX indicator and DMI Index

ADX+DMI

 

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

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Technical Analysis of ADX indicator

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 ADX 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 ADX turns down from above 30.

 

Technical Analysis of ADX indicator- Sell Signal

Sell Signal

 

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