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Forex Indicator ADX

The “Average Directional Movement Index”, or “ADX”, indicator is a member of the “Trend” family of technical indicators. J. Welles Wilder created the ADX in 1978 in order to measure the strength of trend forces. Traders use the index to determine if a trend will extend or gradually lose its strength, valuable information when setting entry and exit levels in the forex market.

The ADX can also be classified as an “oscillator” since the various curves produced fluctuate between values of zero and 100. The “signal” line of the indicator rarely goes above 60, but values below 20 indicate a weak trend, and values over 40 suggest a strong one. The indicator consists of three lines, one each for measuring descending and ascending trends (referred to as “DM” or Directional Movement lines), and then the “signal” line that represents the “absolute” force of either the ascending or the descending trend.

ADX Formula

The ADX indicator is available on Metatrader4 trading software, and the rather complex calculation sequence involves the following general computations:

  1. Positive and negative DM indicators are developed based on the previous period’s high/low values;
  2. An Average DM for N periods is calculated for both positive and negative trends;
  3. Each Average DM is normalized by dividing it by the “Average True Range”, another indicator, to arrive at two indexes;
  4. A directional index is computed as an absolute value percent of the difference of the two DM’s divided by their sum;
  5. Lastly, a moving average of the Directional Index is calculated for N periods.

Software programs perform the necessary computational work and produce an ADX indicator as displayed in the bottom portion of the following chart:

 

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