|
The Average Directional Index (ADX) is a widely used technical indicator in the world of day trading. It plays a crucial role in helping traders identify the strength of a trend and make informed buy and sell decisions. In this article, we will delve into the ADX indicator, its formula, and how to effectively use it to generate reliable buy and sell signals for successful day trading strategies.
What is the Average Directional Index (ADX)? The Average Directional Index (ADX) is a momentum oscillator that falls within the family of trend-following indicators. Developed by J. Welles Wilder, ADX measures the strength of a price trend and does not provide information about the direction of the trend (upward or downward). Instead, it quantifies the strength of a trend on a scale from 0 to 100, where higher values suggest a stronger trend.
ADX Formula: The ADX is derived from the calculation of two other indicators, the Positive Directional Index (+DI) and the Negative Directional Index (-DI). The formula to calculate ADX involves the following steps:
a. Calculate the True Range (TR) - the greatest of the following three values:
Current high minus the current low Absolute value of the current high minus the previous close Absolute value of the current low minus the previous close b. Calculate the Directional Movement (DM) for both upward and downward movements:
+DM = Current high minus the previous high (if positive) or 0 (if negative) -DM = Previous low minus the current low (if positive) or 0 (if negative) c. Smooth the +DM and -DM values using a Wilder's smoothing function over a chosen period (typically 14 periods).
https://www.finowings.com/technical-analysis/leading-indicator-and-oscillators/average-directional-index/
|
