ADX: Average Directional Movement Index (and ADX Wilder)

The idea in plain words

Each candle, the market either pushes higher than before (upward movement) or lower (downward movement). +DI measures the recent upward pushes, −DI the downward pushes. ADX measures how far apart the two are: if one side clearly dominates, the trend is strong.

How it is calculated

The upward move is today's high minus yesterday's high; the downward move is yesterday's low minus today's low. Only the bigger of the two counts for that candle. Both are compared with the true range (the candle's full size including gaps), averaged, and turned into percentages.

+DM = today's high − yesterday's high (if larger than the down move and above 0, else 0)
−DM = yesterday's low − today's low (if larger than the up move and above 0, else 0)
+DI = 100 × average(+DM) ÷ average(true range),  −DI likewise
DX = 100 × |+DI − −DI| ÷ (+DI + −DI)
ADX = average of DX over N (default 14)
ADX uses exponential averages (the common platform version); ADX Wilder uses Wilder's own smoothing, as in his book.

How to use it

• ADX above about 20–25: a trend worth following. Below 20: a range, better for buying low and selling high inside it.
• +DI above −DI: buyers have the upper hand; −DI above +DI: sellers.
• A rising ADX means the trend is getting stronger, a falling ADX that it is fading.

Drawing conclusions

• ADX says nothing about direction by itself: a falling market with strong selling also has a high ADX.
• A +DI/−DI crossover with ADX rising is a stronger signal than a crossover with ADX flat and low.

Watch out for

• ADX is slow; it often peaks after the strongest part of a move.
• Very high readings (above 50) are rare and often near exhaustion.

A little history

J. Welles Wilder Jr. introduced the Directional Movement system, including ADX, in his 1978 book "New Concepts in Technical Trading Systems", the same book that introduced RSI, ATR and the Parabolic SAR.