Average Directional Index [ADX]
The average directional index, or ADX, was developed by J. Welles Wilder as a measure of a current market trend’s strength. The ADX is derived from two directional indicators, known as DI+ and DI-, which are in turn derived from the directional movement inde] (DMI).
ADX is calculated by finding the difference of DI+ and DI-, as well as the sum of DI+ and DI-. The difference is divided by the sum, and the resulting number multiplied by 100. The product is known as the directional index, or DX. A moving average is then taken of DX, typically over a fourteen-day period (although any number of periods can be used.) This final moving average is the ADX.
The ADX takes the form of a number from 0 to 100. A value of 0 indicates that the market is equally likely to move in either a positive or negative direction, meaning that there is no overall market trend. A value of 100 indicates that the market is exclusively moving in either a positive or negative direction, indicating an extremely strong trend. Values of greater than 60 are uncommon in practice, and any value of greater than 40 is considered to be a strong trend. Any value less than 20 is considered to be a weak trend, and may signal an upcoming reversal. Because the ADX is derived from both positive and negative directional indicators, it only measures the magnitude of a trend rather than its direction.