Average Directional Movement (ADX)
The Average Directional Movement Index was developed by J. Welles Wilder.
More information about it can be found in his book, New Concepts in Technical
The Average Directional Movement Index is designed to show when a market is
in a trending or non-trending mode. It is made up of four elements; the +DI
(positive directional indicator), the -DI (negative directional indicator), the ADX
line (Average Directional Index) and the ADXR line (a 'smoothed-out' ADX line).
The +DI and -DI show upward and downward movements. When the +DI line is
above the -DI line, it shows a bullish or upward trend is occurring, conversely
when the -DI line is above the + DI line, it shows a bearish or downward trend.
The ADX line is generated from these two lines. When the ADX line is rising, it is
indicative of a trending market. When the ADX line levels off or falls, it indicates a
possible non-trending environment.
The ADX line usually oscillates from below 20 to above 40. When the ADX is
below 20, it is an indicator of a non-trending period. At these times, your trading
strategy should favor non-trending approaches. When the ADX line rises abruptly
above 20, it could signal the beginning of a major trend, and you should
implement your trend-following trading strategies. When the ADX line peaks out
above 40 and begins to drop off, it usually means the trend is dying out and a
more turbulent market environment has arrived.
The ADXR line is a simple moving average of the ADX line (generally about a 14
period moving average) which 'smoothes' out its movements often making it a
better indicator or at least a good co-indicator that confirms or reinforces the
movements of the ADX line.
When all four lines are used together, a trending or non-trending mode can be
determined, and the time to buy and sell can be predicted with some success
during a good strong trend. Once the trend indicators (ADX and ADXR) move
down, especially once they drop below the 20 line, no trend is indicated and the
buying or selling of contracts should then be based on other factors.
The image above (captured from an actual hourly ACT price chart) shows the S
& P Index future contract for March of 2000. The lower graph shows the ADX
graph in action.
As you can see, on the 24th of January, the ADX line (purple) abruptly moved
above the 20 % line, indicating the possible beginning of a new trend. It was
closely followed by the ADXR line (cyan) as a confirmation. At this point the -DI
line (yellow) was well above the +DI line (green), indicating that any trend would
be bearish. This indicates a good time to go short on the S & P at about 1430
The ADX line continues to move upward, with a slight downward tilt early on the
27th, but still not above the 40% line and the -DI line is still above the +DI line.
Finally, on the 28th, the ADX line breaks through the 40% mark, then begins a
downturn, dropping back below the 40% mark on the 31st. This is followed by a
downturn in the ADXR line as well as the -DI line crossing back under the +DI
line. These are pretty solid indications that the trend has expired.
This would be a good opportunity to bail out at around 1370, with a trade
covering some 60 points. At $250.00 per point, that rounds out to $15000.00! A
nice gain for a week's work!