Average Directional Index
Encyclopedia
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.
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):
After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:
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:
Variations of this calculation typically involve using different types of moving averages, such as a weighted moving average or an adaptive moving average.
J. Welles Wilder
J. Welles Wilder Jr. is an American mechanical engineer, best known for his work in technical analysis. Wilder is the father of several technical indicators that are now considered to be core indicators in technical analysis software. These include Average True Range, the Relative Strength Index ,...
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 RangeAverage True RangeAverage True Range is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities. The indicator does not provide an indication of price trend, simply the degree of price volatility....
- -DI = 100 times exponential moving average of -DM divided by Average True RangeAverage True RangeAverage True Range is a technical analysis volatility indicator originally developed by J. Welles Wilder, Jr. for commodities. The indicator does not provide an indication of price trend, simply the degree of price volatility....
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 valueAbsolute valueIn mathematics, the absolute value |a| of a real number a is the numerical value of a without regard to its sign. So, for example, the absolute value of 3 is 3, and the absolute value of -3 is also 3...
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.