Average Directional Index

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The Average Directional Index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument. ADX has become a widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.

Calculation

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with an exponential moving average.

To calculate +DI and -DI, one needs price data consisting of high, low, and closing prices each period (typically each day). One first calculates the Directional Movement (+DM and -DM):

UpMove = Today’s High − Yesterday’s High

DownMove = Yesterday’s Low − Today’s Low

if UpMove > DownMove and UpMove > 0, then +DM = UpMove, else +DM = 0

if DownMove > UpMove and DownMove > 0, then -DM = DownMove, else -DM = 0

After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:

+DI = 100 times exponential moving average of +DM divided by Average True Range

-DI = 100 times exponential moving average of -DM divided by Average True Range

The exponential moving average is calculated over the number of periods selected, and the average true range is an exponential average of the true ranges. Then:

ADX = 100 times the exponential moving average of the Absolute value of (+DI − -DI) divided by (+DI + -DI)

Variations of this calculation typically involve using different types of moving averages, such as a weighted moving average or an adaptive moving average.

If you would like to know more, please download or read online our e-book under the Education menu.

Thank you for your interest.

QEForex Team