The average movement index ( A.D.X. ) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of financial instrument prices. A.D.X. has become a widely used indicator for technical analysts, and is provided as a standard in the collection of indicators offered by various trading platforms.
Video Average directional movement index
Calculation
The A.D.X. is a combination of two other indicators developed by Wilder, a positive direction indicator (abbreviated DI) and a negative direction indicator (-DI). The A.D.X. combine and refine the result with a smoothed moving average.
To calculate DI and -DI, ​​â € <â €
After selecting the number of periods (Wilder used 14 days initially), DI and -DI are:
- DI = 100 times average moving average (DM) divided by average true range
- -DI = 100 times the smooth moving average (-DM) divided by the actual average range
The smoothed moving average is calculated over the number of selected periods, and the actual average range is the smoothed mean of the correct range. Then:
- A.D.X. = 100 times the smooth moving average of the absolute value (DI - -DI) divided by (DI -DI)
This variation in calculations typically involves the use of different types of moving averages, such as exponential moving averages, weighted moving averages or adaptive moving averages.
Maps Average directional movement index
Interpretation
The A.D.X. does not show the direction of trend or momentum, just the power of the trend. This is an indicator that lags behind; that is, the trend must already exist before A.D.X. will generate a signal that the trend is in progress. A.D.X. will range between 0 and 100. Generally, A.D.X. readings below 20 indicate trend weakness, and readings above 40 indicate trend strength. A very strong trend is indicated by a reading above 50. Alternative interpretations have also been proposed and accepted among technical analysts. For example it has been shown how A.D.X. is a reliable coincident indicator of the development of classic chart patterns, where A.D.X. readings below 20 occur just before the pattern of breakouts.
Time
Various methods of market timing have been made using A.D.X.. One of these methods is discussed by Alexander Elder in his book Trading for a Living. According to Elder, there is a buy signal when A.D.X. peak and begin to decline when the DI is above -DI. With this strategy you will sell when A.D.X. stop falling and become flat.
References
Source of the article : Wikipedia
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