Skip links

ADX Average Directional Index Chart

Average Directional Index

ADX has some weaknesses that make it unsuitable to be used as a standalone indicator. To start with, it is based on moving Average Directional Index averages, which means that it is largely a lagging indicator that reacts slower to price changes in the market.

What is best setting for ADX indicator?

The traditional setting for the ADX indicator is 14 time periods, but analysts have commonly used the ADX with settings as low as 7 or as high as 30. Lower settings will make the average directional index respond more quickly to price movement but tend to generate more false signals.

Directional movement is negative when the prior low minus the current low is greater than the current high minus the prior high. This so-called Minus Directional Movement (-DM) equals the prior low minus the current low, provided it is positive. Directional movement is positive when the current high minus the prior high is greater than the prior low minus the current low. This so-called Plus Directional Movement (+DM) then equals the current high minus the prior high, provided it is positive. Directional movement is calculated by comparing the difference between two consecutive lows with the difference between their respective highs.

Limitations of Using the Average Directional Index (ADX)

We do not track the typical results of our past or current customers. As a provider of educational courses, we do not have access to the personal trading accounts or brokerage statements of our customers. As a result, we have no reason to believe our customers perform better or worse than traders as a whole. The ADX is not a useful indicator when prices are moving sideways. An ADX line may drop below 20 and even get closer to 10 during a prolonged consolidation period.

Average Directional Index

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% 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. To apply an ADX oscillator to a chart, a trader needs to follow the procedure common to all Marketscope indicators.

ADX calculation

Breakouts happen when an asset’s price has sudden momentum, generally due to increased supply and demand. The difference creates price momentum, whether it is more demand than supply or more supply than demand. Generally, ADX peaks above 25 are considered solid, even if they are lower. In an uptrend, the price can still rise on a falling ADX momentum because overhead supply is used up as the trend progresses. The descriptions, formulas, and parameters shown below apply to both Interactive Charts and Snapshot Charts, unless noted. Please note that some of the parameters may be slightly different between the two versions of charts. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

Average Directional Index

The ADX considers every possible configuration that could occur between two days of trading relative to the Directional Movement Index. The largest part of today’s high or low that is outside of yesterday’s high or low range is calculated. If the largest part of today’s range is above yesterday’s, then the value is marked as PDI, while the largest part of today’s range below yesterday’s yields a value denoted as MDI. The Directional Movement is divided by the True Range in order to make directional movement relative to true range. Parabolic SAR is a leading trend following indicator, and when combined with ADX, it could help traders to capture maximum returns in a trending market. ADX crossovers can take time to form in the market, and traders can enter a trending market early with Parabolic SAR when 3 consecutive parabolas are printed in the direction of the trend. Similarly, an early exit signal can be identified by Parabolic SAR when the parabolas flip onto the opposite side of the trend.

Overall Uptrend with +DI Crossing above -DI

When J. Welles Wilder developed the ADX and DMI, he applied the indicators to the commodity and currency market. However, you can use them on stocks and apply them to charts with multiple time horizons—weekly, daily, or intraday.

Leave a comment