Average Directional Movement Index
Average Directional Movement Index (ADX)
Section titled “Average Directional Movement Index (ADX)”The Average Directional Movement Index (ADX) is a technical indicator that helps determine if there is a price trend. It was developed by Welles Wilder and described in his book ‘New Concepts in Technical Trading Systems’.
Trading Method
Section titled “Trading Method”The simplest trading method based on the ADX involves comparing two direction indicators: the 14-period +DI and the 14-period -DI. To do this, one either overlays the charts of the indicators or subtracts +DI from -DI. According to Welles Wilder, buying is recommended when +DI is higher than -DI, and selling is recommended when +DI is lower than -DI.
Points of Extremum
Section titled “Points of Extremum”Welles Wilder added a rule of points of extremum to the trading method. This rule is used to eliminate false signals and reduce the number of trades. The point of extremum is the point where +DI and -DI cross each other. If +DI rises higher than -DI, the point of extremum is considered the maximum price of the day when they cross. If +DI is lower than -DI, the point of extremum is considered the minimum price of the day when they cross.
Market Entry Level
Section titled “Market Entry Level”The point of extremum is used as the market entry level. After receiving a buy signal (+DI is higher than -DI), one must wait until the price exceeds the point of extremum before buying. However, if the price fails to exceed the level of the point of extremum, one should retain the short position.