Average Directional Movement Index
Technical Indicator Average Directional Movement Index (ADX) helps determine if the price of a market is trending or not. It was developed by Welles Wilder in his famous book "New concepts in technical operational systems" (New Concepts in Technical Trading Systems). The simplest method to use Average Directional Movement Index (ADX) is to use two directional indicators, + DI and-DI both 14 periods. Welles Wilders estimated that a buy signal when the + DI rises above the-DI and a sell signal when the + DI-DI down the.
these simple rules for operational Welles Wilder adds an "extreme point rule", which is used to filter false signals. The "end point" is that when + DI and-DI cross. If + DI rises above the-DI is the peak of prices during the day and similarly when the + DI crosses below the-DI would be the minimum price during the day.
anchor points are used as indicators of open positions. When given the signal to buy (+ DI is higher than-DI) must wait until the price has passed the extreme, and only after that buy. However, if the price falls below the extreme, you have to open a short position.
The following example shows the application of the ADX indicator in Forex USD / JPY.
ADX Calculation = SUM [(+ DI-(-DI ))/(+ DI + (-DI)), N] / N
Where:
N: number of periods used in the calculation
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