Average Directional Movement Index (ADX)

A derivative of the directional movement indicator (DMI), ADX measures the strength of a market trend, not its direction. The higher the ADX, the more directional (stronger trend) the market has been. The lower the ADX, the less directional (weaker trend) the market has been.

It does not measure whether the market is rising or falling. Similarly, the OB/OS parameter attempts to set boundaries on the strength or weakness of the trend (whether an uptrend or a down trend), rather than the strength or weakness of the market.

There are 4 basic methods of using the study:

• The first is as a break out by stating that the ADX has risen through 20 or 25.

• The second is for trend exhaustion. The ADX is above 45 and now turns downwards.

• The third is for acceleration. The ADX rises in value by more than 3 between the previous bar and the current bar.

• The fourth is in conjunction with the DMI and is when the ADX crosses above the higher valued DMI line.

For system creation, remember that a sharp change to a new trend from a previous trend will not be picked by the indicator and that a falling ADX can be a good filter for creating sideways systems, especially if you create upward limits on its value.

The calculation is:

ADX = -MA[ABS((+DI-(-DI))/(+DI+(-DI))), Smo, N]-

where n = the number of periods used in the calculation

i.e. ADX is smoothed average of absolute value of (+DI-(-DI))/(+DI+(-DI))

Additionally, the ADX study reports an ADXATR value. The Average True Range of the ADX indicator is calculated by taking a smoothed average of the Average True Range of the price bars. In other words, the ATXADR simply reports the same value that the ATR study alone would report for the given price data.

Average Directional Movement Index Parameters

Parameter	Description
Display	Opens sub-window to set parameters • Color = Line color. • Weight = Line thickness. • Display = Line style: line or histogram. • ShareScale = Determines whether sharing of the vertical scales between studies is accepted. Auto = System determine whether sharing is feasible. On = Scale is shared regardless of the functions and studies displayed. Off = Scale is not shared. ShareScale must be On if study is overlaid on a study with multiple outputs.
MarkIt	Opens Specify Conditions window.
Period	Number of bars in the lookback range.
OB/OS	Opens sub-window with overbought and oversold parameters: • Color = Select a color for the line. • Weight = Choose a thickness for the indicator. • Type = Choose fixed or dynamic. Fixed = uses Level as a fixed OB/OS value. Dynamic = uses Standard Deviation and Lookback for a dynamic OB/OS value:. OB: MA(@,Sim,lookback) + factor * STDDEV(@,lookback) OS: MA(@,Sim,lookback) - factor * STDDEV(@,lookback) where @ is the study • Std Dev = Multiplier used to calculate high and low. • Lookback = Number of bars to compare to the current bar. • Level = Percentage of average OB/OS used to calculate predictor Ob/OS levels. • Display = Click this check box to display the component. • Style = Choose a line style.