Average Directional Movement Index (ADX), often referred to as ADX Wilder, is a crucial tool for traders looking to identify market trends.
This technical indicator is designed according to the methodology laid out by Welles Wilder in his influential book, "New Concepts in Technical Trading Systems".
You can find detailed trading rules for the ADX in the Average Directional Movement Index documentation.
How the ADX is Calculated:
The calculation begins with determining the positive (dm_plus) and negative (dm_minus) movements for each bar, as well as the true range (tr):
If Low(i-1) - Low(i) > 0 dm_minus(i) = Low(i-1) - Low(i), otherwise dm_minus(i) = 0.
tr(i) = Max(ABS(High(i) - Low(i)), ABS(High(i) - Close(i-1)), ABS(Low(i) - Close(i-1)))
Where:
- High(i) - highest price of the current bar;
- Low(i) - lowest price of the current bar;
- High(i-1) - highest price of the previous bar;
- Low(i-1) - lowest price of the previous bar;
- Close(i-1) - closing price of the previous bar;
- Max(a, b, c) - maximum value among a, b, and c;
- ABS(X) - absolute value of X.
Next, we calculate the smoothed values: Plus_D(i), Minus_D(i), and the Average True Range (ATR):
Plus_D(i) = SMMA(dm_plus, Period_ADX,i)/ATR(i)*100
Minus_D(i) = SMMA(dm_minus, Period_ADX,i)/ATR(i)*100
Where:
- SMMA(X, N, i) - Smoothed Moving Average of the X series for the current bar;
- Period_ADX - number of bars used for calculation.
Now, we compute the Directional Movement Index (DX(i)):
After these preliminary calculations, we derive the value of the ADX(i) for the current bar by smoothing the DX values:
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