Average Directional Movement Index (ADX) – indicator MetaTrader 5
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Average Directional Movement Index technical indicator (ADX) helps to determine the market 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 whenever the +DI crosses above the -DI, and selling when -DI crosses above the +DI. In addition to these simple commercial rules, Wells Wilder offered the extreme point rule. It is used to eliminate false signals and decrease the number of deals. According to the principle of extreme points, the “extreme point” occurs 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 extreme point is used then as the market entry level. Thus, after the signal to buy (+DI is above -DI) one must wait till the price exceeds the extreme point, and only then buy. However, if the price fails to exceed the level of the extreme point, one should retain the short position.
ADX Indicator
Calculation:
ADX = SUM ((+DI – (-DI)) / (+DI + (-DI)), N) / N
where:
N – the number of periods used in the calculation;
SUM (…, N) – sum for N periods;
+DI – value of the indicator of the positive price movement (positive directional index);
-DI – value of the indicator of the negative price movement (negative directional index).
