Average Directional Movement Index

Average Directional Movement Index Technical Indicator (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 Based on Directional Movement

The simplest trading method using the ADX involves comparing two direction indicators: the 14-period +DI and the 14-period -DI. This can be done by overlaying the indicator charts or subtracting +DI from -DI. According to Welles Wilder’s recommendations, buying is advised when +DI is higher than -DI, and selling is advised when +DI is lower than -DI.

Points of Extremum Rule

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. If +DI is lower than -DI, the point of extremum is considered the minimum price of the day.

Market Entry Level

The point of extremum is used as the market entry level. After receiving a buy signal (+DI higher than -DI), one should wait for the price to exceed the point of extremum before buying. However, if the price fails to exceed the level of the point of extremum, one should maintain a short position.