Average Directional Movement Index (Average Directional Movement Index for short) ADX) - technical indicator for exchanges, including , the main function of which is to determine trending. As well as . ATR indicator It was created by Wells Wilder and described in detail in his book "New Concepts of Technical Trading Systems.
The ATR indicator is standard for MetaTrader 4 trading terminal.
ADX indicator trading signals
Wells Wilder suggested the use of constituent ADX indicator as a ready-made trading strategy. To determine the trading signal, it is necessary to fix the intersection of the 14-period +DI and the 14-period -DI:
– buy signal occurs when +DI rises above -DI;
– sell signal - when +DI falls below -DI.
For convenience, the +DI and -DI indicators are plotted on top of each other.
Extreme point of the ADX indicator
Since ADX indicator is trendingIf you have a problem with the strategy, then false signals from it are not uncommon. To reduce their number, Wells Wilder supplemented his strategy with the "Extreme Point Rule". The principle is simple: when you fix the crossing of +DI and -DI, you need to mark the "extreme point". In the case of a buy signal, this point is the maximum price of the day of crossing. If there is a sell signal, this point is the minimum price of the day of crossing.
This extreme point is used by traders as a limiting level for entering the market. After the signal to buy (+DI above -DI) it is necessary to wait for the price chart to be above the set extreme point, only then you should enter into purchase transaction. If the price does not pass the extreme point level, it is better to stay out of the market. Similar rules, but in the opposite direction, will be true for a sell signal.
Formula for calculating the ADX indicator
ADX = SUM[(+DI - (-DI)) / (+DI + (-DI)), N] / N,
where N is the number of periods used for the calculation.