The Average Directional Movement Index indicator or ADX helps you to measure the overall strength of a trend. When you trade in the direction of a strong trend, you’ll decrease risk while increasing your chance of making profits. Several traders consider the Average Directional Movement Index the best trend indicator and use it to help them confirm all of their trades. Wherever the two-directional lines (+D and -D ) cross each other, that’s referred to as a point of extremum.
Two direction indicators are compared, either by putting one chart on top of the other or by subtracting +D from -D. It’s recommended that you buy when +D is higher than -D and sell when +D drops below -D. The point of extremum is used as the market entry-level.
If +D is higher than -D, that’s considered a signal to buy and you’ll need to wait until the price is above the point of extremum before you buy. If the price doesn’t exceed the point of extremum, the trader should maintain their short position.
Average Directional Movement Index Calculation
The Average Directional Movement Index is based on a moving average of the price range expansion over a specific period. You can use any time frame that’s best for you, although a 14 period is usually used.
ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N Where: N – the number of periods used in the calculation.