Average Directional Index

How the Average Directional Index Indicator works

This tool yields signals by calculating the Plus Directional Indicator and the Minus Directional Indicator.

Trend strength can be determined by observing:

  • ADX rise which implies that market trend is getting stronger 
  • ADX fall, which indicates that the trend is unstable. 

Moreover, a more complex ADX trading system can generate:

  • A buy signal if Plus Directional Indicator (+DI) or the green line goes above the Minus Directional Indicator (-DI) or the red line
  • A sell signal if Minus Directional Indicator or red line goes above Positive Directional Indicator  or green line.

ADX Trading Strategy

This trading strategy’s goal is to determine the most influential trends as well as to differentiate conditions that are trending and non-trending.

Through ADX, a strong trend is detected as the reading yields more than 25, while weak trends are shown for below 25 ADX reading. 

A falling ADX line is misconstrued to be a signal for a reversal of trend, when in fact, it only shows that a strong trend is starting to weaken. As long as the ADX line does not go below the benchmark point, which is at 25, the falling line only signifies a weakening trend.

Formula:

The positive Directional movement (+DI) is determined by finding the difference between the highest price of the previous trading day and the current highest price. For the Negative Directional movement (-DI), compare the lowest amount of the last day to that of the lowest price of the present day and get its difference. After such, the directional movement’s average is computed.

ADX = MA [((+DI) – (-DI))] x 100;

Where:

+DI – Plus Directional Indicator

-DI – Negative Directional Indicator.

Risk disclaimer "Market Solutions Ltd – Suite 305 Griffith Corporate Centre P.O. Box 1510 Beachmont, Kingstown, St Vincent and the Grenadines is a financial services institution outside the European Union Area, which is subject to the supervision of the IFMRRC Certificate 0395 AA V0128 Trading in Forex/ CFDs and Other Derivatives is highly speculative and carries a high level of risk. It is possible to lose all your capital. 70% of trading deals can be unprofitable. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent advice if necessary. Speculate only with funds that you can afford to lose. This Website may contain information in particular regarding financial services and products that could be regarded b a E.U. supervisory authority as an offer of financial services targeted in Europe. ESMA intervention measures do not apply to customers of Market solutions Ltd and it is your responsibility to choose a company which is most suitable for your trading needs. By clicking continue you confirm that you have read, understood and agree to the risk disclosures, terms of service, cash policies, privacy policies and this notice and that you are visiting this website on your own initiative, without any encouragement whatsoever from Umarkets.com or Market Solutions limited." Cookies notification: “We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we assume that you are happy with it. Continue
×

Help with deposit?