What is Average Directional Index (ADX)?
Let's find out Average Directional Index (ADX) meaning, definition in crypto, what is Average Directional Index (ADX), and all other detailed facts.
The Average Directional Index (ADX) is an indicator used to determine how strong a market trend is. The core idea of the ADX is that if the market appears to be following a strong trend, trading is more likely to bring profit, while the risk is significantly lower.
The ADX was initially created by J. Welles Wilder Jr. in the late 1970s to track daily commodity charts. Nowadays, it has been adopted as an indicator for a broad scope of markets, including crypto.
The ADX is a non-directional indicator. This means that it determines the market trend strength regardless of which direction the prices are fluctuating towards. To assess the strength of the prices moving in positive and negative directions, the Directional Movement System (DMI+ and DMI- indicators) is utilized.
The ADX is represented by a line using figures from 0 to 100. It is typically shown in the same window as the two lines known as directional movement indicators (DMI). DMIs are used to calculate the ADX.
How to Calculate the Average Directional Index (ADX):
1. Calculate Directional Movement (+DM) using the formula:
+DM = Current High - Previous High
2. Calculate -DM using:
-DM = Previous Low - Current Low
3. Select between +DM and -DM based on which option has the higher value.
4. Calculate the True Range (TR) using one of the following:
Current high - Current low; Current low - Previous close; Current high - Previous close
5. Calculate the smoothed 14-period averages of the TR, the +DM, and –DM using:
First 14TR = Sum of first 14 TR readings
Next 14TR = first 14TR – (prior 14TR/14) + current TR
6. Calculate the +DI and -DM values using:
+DI = (Smoothed +DM / ATR) x 100
-DI = (Smoothed -DM / ATR) x 100
7. Calculate the directional movement index (DMI) using the equation:
DX = ( | +DI - -DI | / | +DI + -DI | ) x 100
8. Calculating ADX requires the DX for all 14 periods. To calculate the first ADX, divide the sum of all 14 periods of DX by 14. For the remaining 13, use the formula:
ADX = (Previous ADX x 13) + Current ADX) / 14
The process of computing the ADX is entirely automated, so there is no need to manually apply the formulas to calculate the final indicator.
Other commonly used indicators in trading are the Accumulation/Distribution Indicator, Moving Average Convergence Divergence (MACD), On-Balance Volume (OBV), and Relative Strength Index (RSI).