Average Directional Movement Index
Average Directional Movement Index Technical Indicator (ADX)
helps to determine if there is a price
trend. It was developed and
described in detail by Welles Wilder in his book "New concepts in
technical trading systems".
The simplest trading method based on the system of directional movement
implies comparison of two direction indicators:
the 14-period +DI one and the 14-period -DI. To do
this, one either puts the charts of indicators one on top
of the other, or +DI is subtracted from -DI. W. Wilder recommends
buying when +DI is higher than -DI, and selling when +DI sinks lower than -DI.
To these simple commercial rules Wells Wilder added "a rule of points
of extremum". It is used to eliminate false signals and decrease the
number of deals. According to the principle of points of extremum, the
"point of extremum" is the point when +DI and -DI cross each
other. If +DI raises higher than -DI, this point will be the maximum price
of the day when they cross. If +DI is lower than -DI, this point will be
the minimum price of the day they cross.
The point of extremum is used then as the market entry level. Thus,
after the signal to buy (+DI is higher than -DI) one must wait till the
price has exceeded the point of extremum, and only then buy. However, if
the price fails to exceed the level of the point of extremum, one should
retain the short position.
