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Average Directional Index

A negative directional movement occurs when the prior low minus the current low equals greater than the current high minus the prior high. That’s why we’ll take the profit based on the trend strength. As soon as the trend fades, we should be ready to close the trade.

Created by Welles Wilder ; DMI measures the “directional movement”, using today’s high and low prices relative to the previous day’s high and low prices. By smoothing these comparisons over time, DMI uses the theroy that an uptrend sees higher highs, and a downtrend sees lower lows. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Negative directional indicator (-DI) and positive directional indicator (+DI)

The purpose of the average directional movement index is to measure the strength of a trend and create buy or sell signals, depending if the trader should go long or short on an asset. The Average Directional Index helps traders determine the strength of a trend, not its actual direction. It can be used to find out whether the market is ranging or starting a new trend. Its related to the Directional Movement Index and, in fact, the latter has the ADX line included. The oscillator ranges between 0 and 100 with high readings indicating a strong trend and low readings indicating a weak trend.

What is the ADX Indicator?

The Average Directional Index, or ADX, is a trend indicator that is used to quantify the strength of a trend. It is plotted as a single line with a value between 0 and 100. Unlike other trend indicators the ADX is non-directional, meaning it simply register the strength of the trend, not whether it is an up-trend or a down-trend. In order to indicate whether prices are moving higher or lower the ADX Indicator is plotted with the +DMI and –DMI lines from which the ADX is derived.

Once you decide on the value of your threshold level, you can draw a horizontal line to keep it visible on the chart permanently. When using the ADX indicator, it can provide us with information that is missing from a basic price chart. Breakouts happen when there is sudden momentum of an asset’s price, which is normally due to increased supply and demand. Crossovers of the directional movement indicators can create trade signals for potential opportunities. For example, if the +DI line crosses above the –DI line and the ADX reading is above 20, then some traders may see this as a good opportunity to buy and go long.

Trading with the ADX indicator

Trends are extremely important to any trading strategy and the ADX indicator can help you identify the strength of various trends so you can follow them. The average directional index is, like momentum indicators such as the MACD or RSI, typically shown in a separate window above or below the main chart window that shows price.

Average Directional Index

A weakening trend is signaled when 14-day ADX turns down while above 40. Note that ADX only indicates trend strength — not trend direction. It may be wise to supplement ADX with a trend filter, whether directional movement or a moving average, to signal direction. Traders can also use the ADX as a filter to help eliminate erroneous signals. Charts can include oversold or overbought positions for a long time period, especially during a strong trending market. So, to avoid entering or exiting a trade too soon, traders usually look at the ADX indicator. Some versions of the average directional index will also show the +DMI and –DMI lines.

Average Directional Index Strategies

The trend can be either up or down, and this is shown by two accompanying indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI). Therefore, ADX commonly includes three separate lines.

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