Average Directional Index, or ADX in English, is a technical indicator used to measure the strength of price trends. The average trend indicator was proposed by Welles Wilder in 1978 and is designed to measure the strength of stock price trends. It determines whether there is an obvious trend in the market by calculating the direction and size of price movements. Source: IBKR If +DI and -DI begin to converge (Convergence), it means that the current trend is developing in the opposite direction; if +DI and -DI begin to diverge (Divergence), it means that the current trend is strengthening. How to calculate the average trend indicator? The calculation process of the average trend indicator is as follows: 1. Calculate the true range (True Range) True Range, abbreviated as TR, is an indicator of price volatility. You need to calculate the maximum of the following three values: The difference between today’s highest price and today’s lowest price, marked as DIF1 The difference between today's highest price and yesterday's closing price (taken as an absolute value), marked as DIF2 The difference between today's lowest price and the previous day's closing price (taken as an absolute value), marked as DIF3 So, TR = Max(DIF1, DIF2, DIF3) Among them Finally, the moving average of the true fluctuation range for a certain period n (such as 14 days) is calculated, labeled TRn. 2. Calculate +DM and -DM (directional movement) The full name of DM is Directional Movement, which means directional movement in Chinese, including +DM and -DM, and is used to measure the trend strength of prices. +DM is an indicator of price movement in a positive direction and is used to measure the strength of an upward trend; while -DM is an indicator of price movement in a negative direction and is used to measure the strength of a downward trend; To calculate +DM and –DM, we first define two values: Today’s High Price – Yesterday’s High Price, marked DF1 Yesterday’s Low – Today’s Low, marked DF2 Then, the calculation method of +DM and -DM is as follows: If DF1 > DF2, +DM = DF1; -DM = 0 If DF1 < DF2, +DM = 0; – DM = DF2 Finally, calculate the moving average of +DM (marked +DMn) for a certain period n (such as 14 days), and the moving average of -DM (marked -DMn) 3. Calculate +DI and -DI (directional index) DI, the full name is Directional Indicator, which means "directional indicator" in Chinese, and is also used to measure the strength of the upward or downward price trend. DI can be calculated from TRn, +DMn, -DMn in the first and second steps. +DM = (+DMn / TRn) x 100 -DM = (-DMn / TRn) x 100 +DI measures the strength of a market in an uptrend, while -DI measures the strength of a market in a downtrend. By comparing the values of +DI and -DI, the direction and strength of the market trend can be analyzed. When +DI is higher than -DI, it indicates that the upward trend is dominant; conversely, when -DI is higher than +DI, it indicates that the downward trend is dominant. 4. Calculate the Average Trend Index (ADX) Before calculating the average trend index, we must first calculate the trend index DX (Directional Index), and then take the moving average of DX to get ADX. The trend index is calculated from +DI and -DI, and the formula is as follows: Finally, the moving average of the trend index (DX) for a certain period n (such as 14 days) is calculated, which is the average trend index, labeled ADX. The Average Trend indicator is used to measure the strength of a price trend but does not directly show the direction of the trend. What are the limitations of the Average Trend Index?
There are also limitations to using the average trend index to determine the strength of a price trend. The main limitation is its lagging nature. ADX is based on historical data, so its reaction may lag behind actual changes in the market. At the same time, ADX may not be effective enough in markets with low volatility or no obvious trend. What we emphasize most is that you cannot rely solely on one technical indicator as the basis for buying and selling. You need to comprehensively consider other technical indicators and conduct fundamental analysis. For example, you can combine the ADX indicator with trend indicators (e.g. Moving Averages), momentum indicators (e.g. RSI, Stochastic Oscillator), and volume indicators (e.g. Balanced Volume Indicator). More technical indicators What are Fibonacci retracements? Fibonacci Retracement What are Bollinger Bands? How to use? What is the application accumulation/distribution line? A/D Line What is the Commodity Channel Index CCI? How to use the CCI indicator? What is the Stochastic Oscillator? What is the Balanced Volume Indicator? How to use the OBV indicator? What is Moving Average MA? Moving Average What is Moving Average Convergence Divergence (MACD)? What is the Money Flow Index MFI?