Average Directional Movement Index (ADX)

◙ Primary Use: Analyzing Market Conditions

◙ Trading: Evaluating the Market Trend | Taking Advantage of Trading Signals

◙ Standard Settings: 14 Periods

 

Introduction to the Directional Movement System

The Directional Movement System was introduced by Welles Wilder in his book “New Concepts in Technical Trading Systems.” What distinguishes this system from others is that it first determines whether a market is trending before offering trading signals. The default setting uses 14 periods.

The Directional Movement System consists of three lines:

(a) Positive Directional Indicator (+DI) – summarizes upward trend movement

(b) Negative Directional Indicator (−DI) – summarizes downward trend movement

(c) Average Directional Movement Index (ADX) – indicates whether the market is trending or ranging

Chart: ADX on EUR/CAD

 

 

 

Calculating the Directional Movement System

■ First we must calculate the today’s Directional movement

+DM = Today's High - Yesterday's High (when the market moves upward)

-DM = Yesterday's Low - Today's Low (when the market moves downward)

■ After we calculate the True Range for the day, as follows:

Today's High - Today's Low

Today's High - Yesterday's Close

Yesterday's Close - Today's Low

■ Next, we calculate +DM14, as follows:

+DM14 = exponential moving average of +DM

■ Next, we calculate -DM14

-DM14 = exponential moving average of -DM

■ Next, we calculate TR14

TR14 = exponential moving average of True Range

■ After we calculate the Directional Indicators:

+DI14 = +DM14 / TR14

-DI14 = -DM14 / TR14

■ Finally, we calculate the parts of ADX (Average Directional Movement Index)

Calculate the DI Difference (+DI14 and -DI14) as a positive number.

■ Calculate the Directional Index (DX):

DX = DI Difference / (sum of +DI14 and -DI14)

ADX = the exponential moving average of DX

 

Trading with the Average Directional Movement Index (ADX)

Here are some key points for using ADX in trading:

□ +DI indicates upward trend strength, while −DI shows downward trend strength

□ A declining ADX suggests the market is losing direction

□ If ADX falls below both +DI and −DI, it signals poor trading conditions

□ The longer ADX remains below both +DI and −DI, the stronger the next trend is likely to be

□ If ADX rises above both +DI and −DI, it may indicate an overbought market

□ It is advisable to wait for ADX to rise at least 4 points from its low before trading (e.g., if the low is 17, wait until ADX reaches 21)

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Advanced ADX Trading Strategies

1. ADX Trend Confirmation

• Uptrend Confirmed:

  • +DI > -DI (bullish bias)

  • ADX rising & > 25 (strong momentum)

• Downtrend Confirmed:

  • -DI > +DI (bearish bias)

  • ADX rising & > 25 (strong momentum)

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2. ADX for Trend Exhaustion & Reversals

• Declining ADX → Trend is losing strength (prepare for a reversal or consolidation).

• ADX drops below +DI & -DI → Market is choppy (avoid trend trades).

• ADX rises sharply after a long low period → A new strong trend is likely starting.

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3. ADX Breakout Rule (Wilder’s 4-Point Rule)

• Before entering a trade, wait for ADX to rise at least 4 points from its recent low.

  • Example: If ADX bottoms at 17, wait until it reaches 21 before trading.

  • This filters out false breakouts and confirms trend strength.

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4. ADX Overbought/Oversold Warning

• If ADX rises above both +DI & -DI, the trend may be overextended.

  • Look for pullbacks or reversal patterns (e.g., bearish divergence).

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Platform Setup

You can install 'ADX' directly in MetaTrader-4 or MetaTrader-5:

□ GO TO → INDICATORS → TREND → AVERAGE DIRECTIONAL MOVEMENT INDEX

□ SETTINGS → 14 PERIODS

 

■ Average Directional Movement Index (ADX)

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