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Average Directional Index (Directional Movement System) |
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The Average Directional Index (ADX) was developed as a gauge for the strength of a trend, bullish or bearish, with no regard to the direction of prices. Derived from two other indicators, Positive Directional Indicator and Negative Directional Indicator it is meant to be applied to a trending market confirming the start of a trend or hinting of a possible end regardless whether the trend is bullish or bearish.
As an oscillator, the ADX line fluctuates between 0 and 100 with lower readings typically taken to mean the absence of any trend while higher figures mean a trend may be present. Such trends may either be bullish or bearish the key consideration being that the higher the ADX the stronger a trend would be, while lower ADX figures in turn is taken to reflect a weak trend.
Typically, an ADX chart may be divided into four sections, the below 20 range, the 20 to 40 range, the 40 to 60 range and above 60 readings. Below 20 figures are taken to mean that prices are in a trading range, 20 to 40 figures mean that a trend may be present though weak, 40 to 60 readings confirm a strong trend, and above 60 readings mean that the trend is very strong though such an occurrence is rare.
In the preceding chart the Yellow line represents the start of a developing bullish intraday trend for EURJPY following the break to the 20-40 region. Subsequently the Blue line highlights a sharp drop from the above 60 region ending up to 20-40 range indicating a weakening of the up trend.
The ADX indicator was develop by J. Welles Wilder Jr., and introduced in his book New Concepts in Technical Analysis, in 1978.
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