Average Directional Index (ADX)
Developed by J. Welles Wilder Jr., ADX stands for average directional index. It is widely believed to confirm the presence of a price trend.
Calculating ADX is very involved. For greater clarification of any of the steps outlined, consult Wilder's book, New Concepts in Technical Trading Systems:
- Calculate the current period’s Directional Movement (DM)
A = Today’s High – Yesterday’s High
B = Yesterday’s Low – Today’s Low
Depending upon the values of A and B, three possible scenarios are:
Values Scenarios Both A and B < 0 +DM=0, -DM=0 A > B +DM=A, -DM=0 A < B +DM=0, -DM=B
Note: +DM and -DM are two components in the ultimate calculation of ADX. The positive and negative title, suggest highs and lows as opposed to positive and negative numbers.
- Calculate the true range (TR), see ATR
Wilder suggested using a period of 14 for calculations:
- +DM14 = Wilder’s exponential moving average* of +DM for 14 periods.
- -DM14 = Wilder’s exponential moving average* of -DM for 14 periods.
- TR14 = Wilder’s exponential moving average* of True Range for 14 periods.
- Calculate the Directional Indicators
Positive Directional Indicator (+DI14) = +DM14 divided by TR14
Negative Directional Indicator (-DI14) = -DM14 divided by TR14
- DI Difference = The absolute value of the difference between +DI14 and -DI14.
- Directional Index (DX) = DI Difference divided by the sum of +DI14 and -DI14
- ADX = EMA* of DX
*Wilder calculated moving average differently, owing to the need for calculating averages quickly by hand. For example:
Current +DM14 = 13/14 (Previous +DM14) + 1/14 (Current +DM).The first +DM14 value in the series, was simply the sum of the previous fourteen -DM14 values divided by 14 (SMA).