Average directional index, or ADX, is the primary technical indicator among the five indicators that comprise the technical trading system developed by J. Welles Wilder Jr. and is calculated using the other indicators that make up the trading system. The ADX is mostly used as a momentum indicator, or trend strength, but the overall system ADX is also used as a directional indicator.
To calculate the ADX, first determine the + and – directional movement, or DM. +DM and -DM are found by calculating “growth,” or current high minus the previous high, and “movement” or the current low minus the previous low. If the growth is larger than the movement and greater than zero, then +DM is equal to the drop; otherwise it is zero. If the motion is more growth and greater than zero, DM is equal to the movement; otherwise it is zero.
Positive directional indicator, or +di, equals 100 times the exponential moving average (EMA) of +DM divided by average true range over a certain number of time periods. Wells typically used 14 periods. Negative directional indicator, or Di, equals 100 times the exponential moving average of -DM divided by average true range (ATR). By itself, the ADX is 100 times exponential moving average of the absolute value of (+Di minus-Di) divided by (+di-Di).
The ADX indicator is used to indicate the direction of the market, the existence or nonexistence of a trend and momentum market. Market direction is determined by the levels of the +di and-di. If +di is above the number, market direction is up; if -di is greater quantity, market direction is down. The ADX indicator, which ranges from zero to 100, this is a basic Momentum indicator. A value greater than 20 indicates the presence of a trend; a value above 40 indicates a strong trend.