Forex ADX – Average Directional Movement Index

J. Welles Wilder has developed the Forex ADX to define trend force, whether the trend will develop further or will gradually weaken. The indicator allows to analyse tendencies of the market and to make trading decisions in the forex market.

1 Variant - Calculation:

Calculation of positive and negative directed movement (Directional Movement or DM) - +DM_j and -DM_j

If High_j (a maximum of a current bar)> High_j-1 (a maximum of the previous bar),
That +DM_j = High_j - High_j-1, differently +DM_j = 0

If Low_j (a minimum of a current bar) < Low_j-1 (a minimum of the previous bar),
That -DM_j = Low_j-1 - Low_j, differently -DM_j = 0

If +DM_j> -DM_j,

That -DM_j = 0

If -DM_j> +DM_j,

That +DM_j =0

If +DM_j = -DM_j,

That +DM_j =0, -DM_j =0

Determination of the true range - TR_j

TR = maximal module of three values

|High - Low |, |High - Close_j-1 |, |Low - Close_j-1 |.

Close_j-1 - the close price of the previous period.

Note: In most cases module |High - Low| will be maximal on forex in absence of price breaks.

Determination of the indicator of a positive direction and the indicator of a negative direction - +DI_j and -DI_j (Directional Index).

+DI_j = Exponential Moving Averagej (+SDI, N)

-DI_j = Exponential Moving Averagej (-SDI, N)

Where, if TR_j not =0,

That +SDI_j = +DM_j / TR_j; -SDI_j =-DM_j / TR_j If TR_j = 0,

That +SDI_j = 0, -SDI_j = 0,

Determination of Forex average directional index- Forex ADX_j

ADX_j = Exponential Moving Average_j (DX, N). Where DXj it is calculated under the formula.

Forex ADX looks as follows.

Description:

Actually Forex ADX concerns to a class of oscillators, which fluctuates in a range from 0 up to 100. In spite of the fact that movements of the indicator is in a range from 0 and up to 100, movement above a mark in 60 occurs seldom enough. A value below 20 signals a weak trend, and a value above 40 signals about a strong trend. Data above 40 can show both strong descending, and a strong ascending trend.

Forex ADX also can be used for definition of potential changes in the market. When indications of the indicator pass border 20 from below upwards is can speak about change of a trend and its further development. When the indicator shows value less than 40, falling from higher level, it means that the trend has lost force.

Forex ADX is deduced from two other indicators which also are developed by Wilder. One indicator is named Positive Directional Indicator (in most cases it is sometimes designated "+DI"), the second indicator - Negative Directional Indicator (it is designated as "-DI"). On the chosen time interval +DI - shows force of upwards movements, and -DI on the contrary shows force of downwards movements for the certain period.

Forex ADX shows force of a trend and unites +DI and -DI smoothing data with moving average.

Use: In the base kind buy and sell signals act on crossings +DI/-DI. The buy signal comes, when +DI crosses -DI from below, and a sale signal comes, when -DI crosses +DI from top.

For the trader it will be important to catch a trend at an early stage of development and Forex ADX should help him at achievement of the purpose and getting of benefit from fulfilment of transactions. To catch a trend at early stages, it is necessary to look at currency pairs where Forex ADX crosses 20 from below upwards.

Accordingly the falling of Forex ADX below 40, signals that the current trend is weakened and the trading range can begin. Thus, Forex ADX shows presence or absence of a trend, and for definition of input points and a direction of an input it is possible to use other indicators.

Lacks: The input signal submitted by crossing of -DI and +DI often happens false when the currency pair is in a trading range.

2 Variant - Calculation:

Other variant of calculation of Forex ADX:

Forex ADX - is a DX, smoothed by the exponential moving average for the n periods:

Forex ADX = MA(DX, n, E)

DX is calculated as a difference between +DI and -DI and it gives the value of truly directed movement. The sum of +DI and-DI gives the value of total amount of directed movement within period. DX for n periods is calculated by the following formula:

DX(n) = 100% * (PDI(n) - MDI(n)) / (PDI(n) + MDI(n)).

The given index defines in percentage a part of the directed movement for n the periods in all movement for these n the periods. It allows expressing force of a trend on a scale numbered from 0 up to 100, without dependence from those, the trend downwards or upwards is directed. The value is as big as the trend is strong.

Where PDI and MDI are calculated by the following formulae:

PDI = MA(PDM,n) / MA(TR,n),

MDI = MA(MDM,n) / MA(TR,n).

TR = max(abs(High - Low), abs(High - Closei-1), abs(Low - Closei-1)).

TR – True Range, positive number.

In the market moving upwards +DI will increase, and -DI will decrease. In the falling market, -DI will increase, and +DI will decrease. When the trend is strong and fast, the corresponding DI movement will be strong and fast. When +DI and -DI are imposed against each other, in the market there was a balance and there is a movement sideways. The market tendency changes at crossing of DI lines. If +DI crosses -DI upwards, in the market there is a bull situation with prevalence of buyers. If +DI has fallen below -DI, it means sellers became more active and the market is ready to move downwards. Thus, crossing of lines DI are signals to buy or sell.

Forex ADXR – Average Directional Movement Index Rating

The Forex ADXR takes the Forex ADX value of a bar and averages it with the Forex ADX value of a recent, trailing bar. This has the effect of smoothing the ADX values. As with the Forex ADX, a rising Forex ADXR might indicate a strong underlying trend while a falling Forex ADXR suggests a weakening trend subject to a reversal. Forex ADXR can also identify non-trending markets or the deterioration of an ongoing trend. Although forex market direction is important in its calculation, the Forex ADXR is not a directional indicator.

The Forex ADXR differs from Forex ADX in that it is less sensitive to short, quick reversals because it results in a 'smoother' calculation. It was developed to compensate for the variance of excessive tops and bottoms and is especially helpful when used in conjunction with trend-following strategies. Strategies that rely on volatility as an indication of movement may not take into account that movement does not necessarily indicate volatility. Forex ADXR provides information pertaining to the strength of a trend, helping you to manage the risk of trading in volatile markets that fluctuate between trending and non-trending.

Forex ADXR measures the strength of a prevailing trend and whether or not there is direction in a market. Plotted from zero on up, usually a reading above 25 can be considered directional. Forex ADX defines the tendency and shows, whether it moves quickly enough to follow it. Forex ADX helps to take benefit, being still in the middle of important trends. This indicator promotes searching of tendency force. If Forex ADX rises, it means that the market tendency becomes stronger. At such times, it is desirable to conclude the bargains only in the direction of the tendency. When Forex ADX falls, it means that the tendency is questionable. Signals submitted by oscillators (RSI, Momentum) are important in this case.

The meaning of the directional analysis is in the fact that it traces changes in mass optimism and pessimism, measuring ability of the bulls and bears to remove the prices beyond the limits of a price range of the previous day. If today's best price is above yesterday's one, the market becomes more optimistic. And on the contrary, if today's lowest price is below yesterday's lowest one, it is possible to speak about changing of the market to pessimism.

Thus, the Forex ADXR is an attempt to quantify momentum change in the Forex ADX. It is calculated by adding the current Forex ADX value and a Forex ADX value ‘n’ periods back, then dividing that sum by two.

This smoothing step results in the Forex ADXR being slightly less responsive than the Forex ADX. Where the Forex ADXR shines is its ability to compensate for the variance of excessive tops and bottoms. It is especially helpful when used in conjunction with trend-following strategies. Strategies that rely on volatility as an indication of movement often fail to take into account movement. Movement does not necessarily indicate volatility. Forex ADXR provides information pertaining to the strength of a trend, helping to manage the risk of trading in volatile markets that fluctuate between trending and non-trending. The interpretation of Forex ADXR is the same as that for Forex ADX, the higher the value, the stronger the trend.

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