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.
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.
DMI
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.
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.
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.
Sell Signal
