Average Directional Movement Index
The Average Directional Movement Index technical indicator (ADX) was developed by Welles Wilder, and is used to determine if a price trend has started. ADX consists of two directional indicators: + DI and -DI, smoothed using a 14 period moving average.ADX is the difference between these two indicators, divided by their sum. You can also overlay the +DI and -DI lines directly onto the same chart:
- Buy when +DI rises above than -DI
- Sell when +DI falls below -DI
However, these rules can give false signals and result is a large number of trades. To address this issue, Wilder introduced the concept of a “point of extremum”. This is the point where +DI and -DI cross:. It is the maximum price for the day if +DI crosses -DI from below, and is the minimum price if +DI crosses -DI from above. Wait until the price increases above this point before buying.
ADX is calculated by taking the difference between +DI and -DI, and dividing by their sum. A simple moving average (SMA) is then used to smooth the result:
ADX = SMA( ( +DI – -DI ) / ( +DI + -DI ), N )
N is the number of periods used for smoothing
You can find more information about technical indicators in the MetaTrader 4 User Guide. Select Help > Help Topics > Analytics > Technical Indicators.