Average Directional Index Strategy


I largely attribute this to the volatility of Bitcoin and less to do with a failure of the indicator. I looked at Bitcoin Futures trying to find some correlation between the ADX and price movements of the cryptocurrency and I could not land on anything definitive. You can start to see as a standalone indicator, the ADX is displaying a few issues. You will need to test and learn to see which numbers work best for your trading style.

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So you should take profits when the indicator breaks below 25. To determine the direction of the trend, use the last 50 candlesticks as a sample size. The second rule says that ADX above 25 signals the presence of a strong bearish/bullish trend. The first ADX trading rule suggests that a reading below 25 is a sign of a non-trading market. To use the ADX indicator to your advantage, take profits when the indicator suggests a breakout by going lower to 25. A value of 25 or higher suggests a strong trend developing.

average true range

We neglected using this custom https://forex-trend.net/ average while calculating ATR as it is possible to use other types of moving averages but it is essential to use while smoothing ADX to get accurate values. If you would like to learn more about price action trading, mean value analysis or the price action signals that we use, then check out our Price Action Protocol trading course information page. In the Price Action Protocol Trading Strategy we use 2 exponential moving averages on the chart to print out the trend mean value. You can open a FREE demo trading account with Admirals which will allow you to trade the ADX indicator on MetaTrader 4 in a virtual environment. This means you can build your experience and test your strategies in a virtual environment until you are ready to go live. Targets are measured by trailing stops or Admiral Pivot points.

Why is the Average Directional Index useful to traders?

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. The indicator was developed by Welles Wilder, who created several core trading indicators.

  • An uptrend is in place when the +DI is above the -DI; whereas a downtrend is in place when -DI is above the +DI.
  • Now it’s time for the fun part, where we cut it open and reveal what’s actually the driving force of this indicators operation.
  • And besides, the trend could be your buddy, and knowing who your pals are is helpful.
  • It is simply the mean, or average, of the values of directional movement lines over a specified period.
  • According to Wilder, whenever the ADX is more than 25, there is a significant trend evident, while when it is less than 20, there is no trend.
  • This article explains the DMI and at the end, we do a backtest to find out if you can use the DMI to make a trading strategy.

SharpCharts users can plot these three directional movement indicators by selecting Average Directional Index from the indicator dropdown list. By default, the ADX line will be in black, the Plus Directional Indicator (+DI) in green and the Minus Directional Indicator (-DI) in red. This makes it easy to identify directional indicator crosses. While ADX can be plotted above, below or behind the main price plot, it is recommended to plot above or below because there are three lines involved. The chart example below also shows the 50-day SMA and Parabolic SAR plotted behind the price plot.

Average Directional Movement Index Trading (And Free ADX Indicator PDF)

“Up move” refers to the current high minus the previous high, and “Down move,” similarly, refers to current low minus the previous low. ADX indicator values of below 25 show that the underlying market is not trending. This is basically a market that requires range-bound plays. As an oscillator,RSIdelivers overbought and oversold trading signals. An RSI reading of above 70 implies overbought conditions, whereas a reading of below 30 implies oversold conditions. A buy order in a ranging market will be when the price is drifting lower, with an ADX reading of below 25, and when the RSI is showing oversold conditions.

But a breakout with an ADX reading of below 25 is potentially unsustainable. From my perspective, the full power of ADX is unleashed when it is accompanied by another technical indicator, especially with RSI to get quality entry and exit points for your trades. So, it is highly recommended to try improvising this article by tuning the ADX strategy accompanied by other technical indicators and backtest it as many as possible. By doing this might help in achieving better results in the real-world market. If you forgot to follow any of the coding parts, don’t worry.

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.

Chapter 1: ADX Components

We can reveal from the start that DMI doesn’t work on its own (both DMI+ and DMI-) – just like the ADX indicator. To get the ADXR, you calculate a simple average of today’s ADX value and the ADX from 14 periods ago. A free demo account to give traders the opportunity to try out different ADX strategies without putting any money on the line. Inside the function, we are creating three empty lists in which the values will be appended while creating the trading strategy. Now, let’s discuss how a simple ADX-based trading strategy can be constructed. While using ATR as an indicator for trading purposes, traders must ensure that they are cautious than ever as the indicator is very lagging.

The ADX can indicate when a trend is absent and a market is likely to continue to chop and range. During this time, traders can alter their trading strategies or wait for a breakout to take a position. ADX stands for Average Directional Movement Index and can be used to help measure the overall strength of a trend. The ADX indicator is an average of expanding price range values. The ADX is a component of the Directional Movement System developed by Welles Wilder. This system attempts to measure the strength of price movement in positive and negative direction using the DMI+ and DMI- indicators along with the ADX.


To https://en.forexbrokerslist.site/ the direction of the trend, you can look at the actual price action. The ADX indicator is used to measure the strength of the trend when used with the +DI and –DI values. So, for these reasons, I would likely not use the ADX as a method for trading Bitcoin but would manage the risk by using smaller position sizes and common chart patterns/trend lines for entry/exit. The minute I would see a pattern or price action at extreme ADX readings, I would then see the next ADX signal fall apart. Therefore, my high volatility traders should not get overly excited every time they see a 50 ADX value. This chart displays an ADX value that is below 20, yet the stock was in a tight range, which is perfect for range traders.

The indicator can also be used to signal when trends are weakening, potentially signaling a reversal. When the average directional movement index is making a series of lower readings you can see that price has little momentum. This also indicates you may want to look for trades other than trend trades. The ADX indicator uses a smoothing moving average in its calculation.

Viktor loves to experiment with building data analysis and backtesting models in R. His expertise covers all corners of the financial industry, having worked as a consultant to big financial institutions, FinTech companies, and rising blockchain startups. ADX crossovers are also helpful for timing your entry and exit points. In a situation where you have a long position and the –DI crosses from below the +DI, it is advisable to lock your profits. You can either close your position entirely or use trailing stops and capture a part of the profits.

These are used to help assess whether a trade should be taken long or short, or if a trade should be taken at all. The main aim of using the ADX is to only focus on trading qualified opportunities in trending markets. This is why it is important to watch out for crossovers of the +DI and –DI lines. When the +DI crosses above the –DI line, it implies that the rate of positive price change in the market is greater than the negative price change. If this happens when the ADX is above 25, it is a solid signal to place buy orders. Similarly, when the -DI crosses above the +DI line, it implies that the rate of negative price change in the market is greater than the positive price change.

ADX is not only used to quantify the strength of a market trend but also becomes a handy tool to identify ranging markets . Whenever the lines move closer to each other, the market is observed to be ranging, similarly, the wider the space between the lines, the more the markets are trending. Those who are introduced to the chart of ADX for the very first time might confuse themselves since the movement of each line is indirectly proportional to the movement of the market. ADX analysis believe values under 20 indicate a weak trend, whereas higher reading around the 40 mark indicator a fairly strong trend. When the ADX prints value up near 60 you’re basically looking at a runaway freight train. As with so many ‘look-back’ trend measures, the ADX is a lagging indicator which can be used other than direction indicators.

If you like to scalp small moves, then a 0 to 10 reading could be perfect for you. First, we need to determine what do with each ADX range we encounter. Now a couple of points to highlight, the ADX cannot have a negative value. So, it’s not like other oscillators that may fluctuate above and below a zero line. Calculate the ADX for a set of 14 values with the formula (DX1 + DX2 +…+DX14) / 14.

Overall Uptrend with +DI Crossing above -DI

ADX is simply the mean, or average, of the values of the DX over the specified Period. Next, divide the smoothed +DM value by the smoothed TR value to get +DI. TR is the greater of the current high – current low, current high – previous close, or current low – previous close.

When the +DMI is above the -DMI, prices are moving up and the ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and the ADX measures the strength of the downtrend. Unfortunately for many traders, price movements aren’t just a game of ups and downs. Often, the most accurate trading signals are in the strength of the trend. That is to say, how likely is it for the price to firmly continue its trajectory or get weaker and reverse course.

It can be used to help you evaluate the https://topforexnews.org/ or an investment’s strength. Keep in mind that trading with margin may be subject to taxation. PrimeXBT shall not be responsible for withholding, collecting, reporting, paying, settling and/or remitting any taxes which may arise from Your participation in the trading with margin. In the example below, TRY is seen falling into a deep downtrend against JPY, as indicated by the ADX going above 25. The trend only continued to increase in strength from there, resulting in a massive decline. The Average Directional Index can be found in many top trader’s arsenals, generating large amounts of profit for those that put it to regular use.

The Best Average Directional Index Trading Strategies

Another way is to combine ADX with another indicator, particularly one that identifies whether the pair is headed downwards or upwards. If there’s one problem with using ADX, it’s that it doesn’t exactly tell you whether it’s a buy or a sell. When you’re using the ADX indicator, keep an eye on the 20 and 40 as key levels.

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That is why it is essential to get familiar with its drawdowns and benefits before deciding whether it can help improve the efficiency of your trading strategy. ADX is the most effective when the market is trending, which, fortunately, is most of the time. When there is a well-established trend, make sure to look for crossovers between the +DI and the –DI lines. The best thing to do during ranging markets is to keep calm and avoid trend-following strategies.

Average Directional Index Strategy


Cory is an expert on https://business-oppurtunities.com/, forex and futures price action trading strategies. The average directional index or ADX indicator was developed in 1978 by J. Welles Wilder for analyzing commodity price charts but can be easily applied to different markets and timeframes. So, it is highly recommended to try improvising this article by tuning the ADX strategy accompanied by other technical indicators and backtest it as many as possible.


  • If the ADX is rising then the market is showing a strengthening trend.
  • In theory, open a trade when lines cross, and the index goes above the 20th level.
  • In the first case, it means the trend momentum is increasing.
  • The stock market can be immensely volatile, and share prices are often influenced by fundamental factors and economic events such as news reports and performance documents.
  • The ADX combines two indicators to create a smoothed moving average that is then shown on your charts.

When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with. An uptrend is present when trading above the 50-day SMA. Positive and negative directional movement form the backbone of the Directional Movement System. Wilder determined directional movement by comparing the difference between two consecutive lows with the difference between their respective highs. Moving average convergence/divergence is a momentum indicator that shows the relationship between two moving averages of a security’s price.

Commodity Channel Index (CCI) Indicator

Breakouts are not hard to spot, but they often fail to progress or end up being a trap. However, ADX tells you when breakouts are valid by showing when ADX is strong enough for price to trend after the breakout. When ADX rises from below 25 to above 25, price is strong enough to continue in the direction of the breakout. ADX can be used on any trading vehicle such as stocks, mutual funds, exchange-traded funds and futures.

The signals occur rarely, but they are high probability trades. The trade was fueled by a long term trend line breakout. This move came when the ADX was above 20, so we were safe to enter short on the market.

In general, when the +DI line is above the -DI line, the market is moving in an uptrend, and when the -DI line is above the +DI line, the market is moving in a downtrend. Therefore, when trading atrending strategy, favor long positions when the +DI is above the -DI line. These indicators can be used in conjunction with the ADX to further filter or confirmtrade signals. The index can be used in any trading strategies that involve opening trades on hourly timeframes and higher.

Step-2: Extracting data from Twelve Data

The MACD indicator is based on the difference between two exponential moving averages to find the direction of the trend and its momentum. The RSI and ADX trading strategy provides a lot of useful information because traders don’t want to be involved in something that is not moving anywhere and not trending strongly. This strategy is useful mainly to cut the false signals potentially generated by the ADX to a minimum. Complementing it with a leading indicator like the parabolic SAR ensures traders’ ability to capture maximum returns while the market is trending.


Then, we are passing a for-loop to find the investment returns followed by some data manipulation tasks. After that, we are implementing the trading strategy through a for-loop. Inside the for-loop, we are passing certain conditions, and if the conditions are satisfied, the respective values will be appended to the empty lists. If the condition to buy the stock gets satisfied, the buying price will be appended to the ‘buy_price’ list, and the signal value will be appended as 1 representing to buy the stock. ADX is not only used to quantify the strength of a market trend but also becomes a handy tool to identify ranging markets .

It will cover sentiment analysis, how to benefit from market sentiment, the different types of sentiment indicators available in the market, and more! Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. You can open trades when the dotted lines cross, and the index is above 40-50%, but it’s not recommended.

What Is the Directional Movement Index?

Alternatively, when the -DI crosses past the +DI line, and the ADX reading is above 20, then they may see this as an excellent opportunity to sell and go short . Now, let’s compare our returns with SPY ETF (an ETF designed to track the S&P 500 stock market index) returns. Before moving on, it is essential to know what backtesting is. Backtesting is the process of seeing how well our trading strategy has performed on the given stock data. In our case, we are going to implement a backtesting process for our Average Directional Index trading strategy over the Apple stock data.

In the second scenario, the downtrend continued but gradually transitioned into a sideways movement. Nevertheless, ADX is included in the basic MetaTrader 4 package and is often used in trading systems as a signal confirmation instrument. You can find another example of ADX divergence in the last chart of this article by Brandon Wendell. At times, you’ll observe that the price action disagrees with the ADX. Under such situations, relying on DI crossovers for entries might not make sense. Do not expect it to be profitable without refining it with other tools like price action and volume.

In other words, the search engine marketing and search engine optimization is non-directional, meaning that it measures the strength of a trend, but doesn’t distinguish between uptrends and downtrends. So, during a strong uptrend, the ADX rises and during a strong downtrend, the ADX also rises. The indicator line on a 1-minute interval was below the 25% level for 5 hours.

The Average Directional Index is among the many technical analysis indicators and trading tools available on the PRimeXBT trading platform. Trends are considered strong at readings over 25, and weak under the key level. The Average Directional Index is often considered the “market strength indicator” and is called the ADX indicator for short. The indicator is one of many created by a pioneer in technical analysis, J. Welles Wilder, who also created the Relative Strength Index, the Parabolic SAR, and many others. Therefore, know the ADX value, but more importantly, understand how your security trades and if the price action aligns with your ADX trading strategy.

negative directional indicator

Therefore, during the flat movement, it will give a lot of false signals. ADX is a short-term indicator that can be used under any type of market conditions (e.g., bull or bear markets, high or low volatility, etc.). It is simply the mean, or average, of the values of directional movement lines over a specified period. DM lines are calculated using current high and low prices. Much like RSI and stochastics, ADX fluctuates between 0 and 100. The bottom part of the chart below demonstrates what the ADX indicator looks like.

How to Trade With the Directional Movement Index (DMI)

These percentages do not represent the possible number of occurrences, but again how many ADX zones between 0 to 100 that are riskier to trade. The below chart illustrates ADX values where trading can become frustrating – red coloring. Some traders make the most of the money on the extremes. That is the ADX is a part of a suite of indicators created by Welles to analyze the market.

How to look for trend momentum

Some stocks have price characteristics similar to commodities, which tend to be more volatile with short and strong trends. Stocks with low volatility may not generate signals based on Wilder’s parameters. Chartists will likely need to adjust the indicator settings or the signal parameters according to the characteristics of the security.

ADX is non-directional; it registers trend strength whether price is trending up or down. The directional movement index is an indicator that identifies whether an asset is trending by comparing highs and lows over time. Like the ADX, crossovers of the two Aroon lines can signal trend changes. Still, as the calculations of each indicator are different, crossovers on each indicator will happen at different periods. Directional movement indicator crossovers can be used to estimate the performance of a security and predict coming changes in a trend, such as reversals or breakouts. They can create trade signals for potential opportunities.

The Average Directional Index is a technical indicator that is used to measure the strength of a price trend over a period of time. Doing so allows traders to identify entry and exit points for every trade. Looking at a chart of the S&P 500 shows that stocks had been in a downtrend for most of 2022, but have bounced higher since mid-June. In more recent weeks, a rising ADX line has confirmed the strength of the uptrend. An ADX reading near 25 also indicates this is a strong trend. Additionally, the DMI plus line is well above the DMI minus line, suggesting the direction of the trend is positive.

The indicator is a part of a larger directional index developed by J. After all these steps, it is time to calculate the Average Directional Index line. Subsequent ADX values are smoothed by multiplying the previous 14-day ADX value by 13, adding the most recent DX value and dividing this total by 14. Smoothed versions of +DM and -DM are divided by a smoothed version of the Average True Range to reflect the true magnitude of the move.