Average directional movement index

The average directional movement index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument.

One first calculates the directional movement (+DM and -DM): After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are: The smoothed moving average is calculated over the number of periods selected, and the average true range is a smoothed average of the true ranges.

For example it has been shown how ADX is a reliable coincident indicator of classical chart pattern development, whereby ADX readings below 20 occur just prior to pattern breakouts.

One of these methods is discussed by Alexander Elder in his book Trading for a Living.

One of the best buy signals is when ADX turns up when below both Directional Lines and +DI is above -DI.