V.9:3 (101-102): The Average Directional Movement Index (ADX) by Thom Hartle

V.9:3 (101-102): The Average Directional Movement Index (ADX) by Thom Hartle
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The Average Directional Movement Index (ADX) by Thom Hartle

Directional movement, according to technician J. Welles Wilder, is one of the most interesting aspects of market analysis. Markets clearly move from trending periods to trading ranges, but determining when this change occurs presented a challenge. To meet this challenge Wilder developed the Average Directional Movement Index (ADX).

The Average Directional Movement Index is an indicator that is designed to rate the directional movement of stocks or commodities. The index uses a scale of zero to one hundred to rate the trend intensity of a tradable. Various markets can be followed and evaluated for trend intensity. After rating each market, you use trend-following systems on the tradeables with a high rating. The tradeables with a low rating on the ADX scale should be followed using a trading range system.

Determining the ADX value is a five-step process and begins with an evaluation of the basic directional movement of the market. There will be only one directional movement value for each day. First, today's high is compared with yesterday's high (Figure 1, points A and C). This difference is defined as the plus directional movement (+DM). Comparing today's low with yesterday's low (Figure 2, points B and D) defines the minus directional movement (-DM). Minus DM is for the purpose of labeling the value only; the value of the -DM is always a positive number. Whichever reading is larger, +DM or -DM, will be used for each day.

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