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Average Directional Movement Index ADX

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What is the Average Directional Movement Index?

The Average Directional Movement Index, or ADX, is a technical indicator used to measure the strength of a trend regardless of a bull or bear trend. Like the Relative Strength Index, it aims to quantify trend strength.

adx and parabolic sar

It was developed by J. Welles Wilder who also developed the Relative Strength Index, Directional Movement and Parabolic Stop and Reverse.

 

How Do I Trade With the ADX?

The ADX is best used and typically charted with the DMI lines. The DMI lines consist of a plus line DI+ and a minus line DI-. The DI+ line is usually colored as a green line and the DI- line is generally colored as a red line. However, if you have advanced charting software you can customize the colors anyway you like.

When the DI+ line is above the DI- line, the trend is considered to be bullish and the further apart the lines, the stronger the trend. Similarly, when the DI- line is above the DI+ line, the trend is considered to be bearish and the further apart the lines, the stronger the bear trend.

Miss Wallstreet Says
 Be careful not to trade on live updating lines. As the price moves, you may think that you are getting in early for a good trade setup only to see the lines collapse or cross back in front of your eyes. From personal experience, it’s best to wait for the lines to complete before taking a trade. 

As the DI lines form and the ADX rises or falls, you will want to take a bullish position when the ADX rises towards 40 and the DI- line is on top. Likewise, when the ADX rises toward 40 and the DI+ line is on top, you will want to take a bearish position.

It is not the best indicator to use in sideways markets as it gives lots of false signals.[adrotate banner=”2″]

Trackbacks

  1. […] Also known as the Parabolic Indicator, the Parabolic SAR is a technical indicator that traders use to determine entry and exit points. It was developed by the same inventor of the Relative Strength Index and the Average Directional Movement Index. […]

  2. […] also decided to pull up another technical indicator that I use occasionally. You can see the DMI or Directional Movement Index at the bottom of the screen. Notice that the new line is higher than the previous high that was […]

  3. […] Determining Trend Direction with Average Directional Index […]

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