Trend Indicators: Average Directional Movement Index (ADX)

Average Directional Movement Index (ADX) was developed and described in detail by Welles Wilder in his book "New concepts in technical trading systems". Average Directional Movement Index (ADX) shows if there is a trend on the market and what potential it has.

ADX represents two opposite +/-DM and ADX lines:

The first goes in the direction of the price movement (+DM).

The second goes in the opposite direction (-DM).

The third (ADX) is the absolute difference between +/-DM lines, so the more divergence between +/-DM lines, the greater the value of ADX.

In order to add the ADX indicator to the chart in MetaTrader 4 use the "Insert -> Indicators ->Trend -> Average Directional Movement Index" menu sequence:

Average Directional Movement Index (ADX) signals (table shown below):

• Intersection with the extremum lines or reversal at high-low.
• +DM and -DM lines intersection precedes a new trend or strengthens the prevailing one - it is a very strong signal.
• If +DM line is above -DM line, then the trend is bullish, and vice versa.
• If lines diverge then ADX value increases and the trend becomes stronger, and vice versa.
• If ADX is below 20, then the trend is very weak.

ADX	Trend	+DM . /. . -DM	Buy/Sell
Very low	Weak		-
Falling	Loses strength		-
Rises	Becomes stronger	Higher Lower	Buy Sell
Forms local low	A new one	Higher Lower	Buy Sell
Very high	Chances for a reversal are great		Take profit on some open positions
Forms local high	Market is overbought / oversold

Warning: This document does not constitute an offer or a recommendation to enter into any transaction. All views and statements expressed are believed to be true and accurate when published. Any person relying on this information to trade does so entirely at his/her own risk. The markets can be very volatile. Prices may move rapidly against you, and past performance is not necessarily a guide to future performance.