Terminology, Thoughts, Trading

Thoughts on the Average Directional Index (ADX) Indicator

I was just reading on the ADX, an indicator that measures “trend strength”. The ADX was developed by Welles Wilder, the same person that developed the Relative Strength Index (RSI).


  • First, ascertain whether the current period went up or down versus the prior period. Instead of looking at Closes, Wilder calculates and compares two figures
    • How much higher is the current period’s high versus the prior period’s high
      • Figure A = Current period’s high minus prior period’s high
    • How much lower is the current period’s low versus the prior period’s low
      • Figure B = Prior period’s low minus current period’s low
  • Calculate each period’s Directional Movement
    • If (both Figures A and B are negative)
      • Positive Directional Movement (+DM) = 0
      • Negative Directional Movement (-DM) = 0
    • If (Figure A > Figure B)
      • Positive Directional Movement (+DM) = Figure A
      • Negative Directional Movement (-DM) = 0
    • If (Figure B > Figure A)
      • Positive Directional Movement (+DM) = 0
      • Negative Directional Movement (-DM) = Figure B
    • Its not clear what the rule is when Figure A = Figure B, but I presume that both will be set to 0.
  • Calculate each period’s True Range (TR)
    • TR measures the largest movement of a period relative to the prior period’s Close, and additionally compares it to the period’s range itself.
    • TR = Largest of
      • Distance between period’s High and prior period’s Close (absolute value)
      • Distance between period’s Low and prior period’s Close (absolute value)
      • Period’s range (distance between period’s High and period’s Low)
    • There is an alternative formula for TR which produces the exact same result: Maximum(period’s High or prior period’s Close)  –  Minimum(period’s Low or prior period’s Close).
  • Calculate the 14-period smoothed versions of the TR, +DM, -DM (see the StockCharts article for more details on the smoothing technique), i.e. TR14, +DM14, -DM14
  • Scale the +DM14 and -DM14 using TR14, i.e. express +DM14 and -DM14 as a percentage of TR14.
    • Plus Direction Indicator (+DI) = +DM14 / TR14 * 100
    • Minus Direction Indicator (-DI) = -DM14 / TR14 * 100
    • Plot both +DI and -DI lines.
    • Essentially +DI represents the upward trend strength, and -DI represents the downward trend strength.
    • When +DI > -DI, it is a signal that the trend has turned upwards; when -DI > +DI, it is a signal that the trend has turned downwards.
  • Calculate the difference in upward trend strength and downward trend strength, and scale it as a percentage of the total trend strength
    • Directional Movement Index (DX) = (Absolute difference between +DI and -DI) / (Sum of +DI and -DI) * 100
  • Finally, calculate the ADX, the 14-day average of the DX.


  • Since the DX measures the absolute difference between +DI and -DI, it measures the trend strength, and does not indicate whether it is an uptrend or downtrend.
  • To determine whether it is an uptrend or downtrend, see which is higher: +DI or -DI.
  • Wilder recommends that when ADX > 25, the market is showing a trend. When ADX is < 20, the market is trendless.


  • By the time you see that the ADX is at 25, or even at 20, you can already visually see from the chart what the trend is, you don’t really need an ADX reading to tell you what is obvious from the chart or from your daily trading.
  • The ADX is a lagging indicator due to the 14-period smoothing.
  • So then, what value does it have? Can it be used as a divergence indicator? i.e. ADX shows a declining trend strength when the price continues to move up. This can also be seen from the price action itself, whether the gradient of the trend has changed.
  • The only value it seems is for use in screening. If you want to find trending stocks, set a screener to search, as one of the criteria, stocks that show an ADX close to 20 and hope to find stocks that are nearing the start of a trend.
  • It is also best to find stocks in the same trend as the broad market.




2 thoughts on “Thoughts on the Average Directional Index (ADX) Indicator

  1. Happy Holidays! Thank you for all you post throughout the year!


    Posted by Clorinda | December 24, 2012, 11:51 pm
  2. Thanks. Happy Holidays to you too!

    Posted by whatheheckaboom | December 25, 2012, 8:18 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Copyright © 2005-2014 whatheheckaboom.wordpress.com. All Rights Reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

Blog Stats

  • 399,452 hits
%d bloggers like this: