Average Directional Index (ADX)
When you are trading in the direction of a strong trend, it reduces the risk and increases the chances of profit. The average directional index (ADX) helps us to understand when the price is trending strongly. At times it's considered to be the ultimate trend indicator. By using ADX one can quantify the strength of a trend.
In This Article –
What is ADX?
How to analyse the chart using ADX?
How to use ADX on KEEV?
Category – Trend
Type – Leading
What is ADX?
ADX stands for Average Directional Index. It's used to help measure the overall strength of a trend. It's an average of expanding price range values. The ADX is a part of the Directional Movement System developed by Welles Wilder. This system aims to measure the strength of price movement in both positive as well as negative directions using the DMI+ and DMI- indicators along with ADX.
ADX calculations have their base in the moving average of a price range expansion over a defined period. The default setting here is 14 bars but other periods can also be used.
How to analyse chart using ADX?
ADX is built as a single line with values that ranges from a low of zero to a high of 100. ADX registers the trend strength which indicates that the price is trending up or down. ADX indicator is generally plotted in the same window as the two directional movement indicator (DMI) lines from which ADX is derived.
Prices are moving up when the DMI+ is above the DMI- and ADX measures the strength of the uptrend. The prices are moving down when DMI- is above the DMI+ and ADX measures the strength of the downtrend. One can see the above chart which is an example of an uptrend reversing to a downtrend. You can observe how ADX rises during the uptrend when the DMI+ is above DMI-. Whereas when the price reversed, the DMI- crossed above DMI+ and ADX rises again to measure the strength of the downtrend. ADX helps to find profitable trends to trade.
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