ADX, Average Directional Movement, what is it?

ADX, AVERAGE DIRECTIONAL MOVEMENT

ADX, HOW TO IDENTIFY THE TREND

ADX, Average Directional Movement, with - DI ( Minus 

Directional Indicator ) and  + DI ( Plus Directional Indicator ), are a 

group of leading indicators that form a real trading system developed by Welles Wilder.

Initially, the indicator was created by Wilder specifically for commodities on a daily basis but then you realized that you can just as easily apply to the analysis of the equity instruments and, with the necessary adjustments, including trading and index futures.

The ADX measures the strength of the trend but do not provide guidance on its direction. The + DI and       - DI  complete function of ADX also defining the direction of the trend. Used together, the three indicators we can determine both the direction of the trend that its strength.

The construction is based on of ADX,  + DM (plus directional moviment) and the  -DM (minus directional moviment) determined, according to Wilder, from the difference between two consecutive minima with the difference of the two respective maximum values.

POSITIVE TREND  =     + DI > - DI

NEGATIVE TREND =    - DI > + DI

 The intersection of these last two indicators is then combined with the value of ADX to obtain a complete system for trading. The fact that Wilder has designed the indicator for the trading of commodities and currencies does not mean it can not also be applied to the actions, of course we're going to choose those actions that show a relatively high volatility, because of poorly volatile stocks can often generate generate false signals or not at all. 

The ADX by its nature can also be used to help decide whether to apply a strategy or a trend following strategy is  no trend following.

According to Wilder is a title to be considered in trend when the ADX indicator exceeds the value of 25, while we in the absence of trend, when the indicator is below the value of 20. Remains a zone of neutrality, that between 20 and 25.

ADX is Black

+ DI is Green

- DI is Red

ADX below the value of 20.

Positive trend = + DI > - DI

A simple operating method devised by Wilder provides for the entry long when the + DI crosses upwards the ADX-DI with greater than 20 (25 the value of the value used by Wilder, taking into account that was applied on the U.S. market). The entry short, conversely, is when the + DI crosses downwards-DI with ADX greater than the value 20. If the ADX indicator is not above the threshold of 20 does not open position.

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