The Average Directional Movement Index (ADX) helps to determine the existence of a price trend. He developed and described in detail in the book “New concepts of technical trading systems” Wells Wilder.
The simplest trading method based on the directional movement system involves comparing two directional indicators of 14-period + DI and 14-period -DI. For this, either the graphs of the indicators are plotted one on the other, or + DI is subtracted from -DI. W. Wilder suggests buying if + DI rises above -DI, and sells when + DI drops below -DI.
These simple trade rules W. Wilder also supplements with the “rule of extreme points”. It serves to eliminate false signals and reduce the number of concluded transactions. According to the principle of extremal points, at the time of intersection + DI and -DI, it is necessary to note the “extreme point”. If + DI rises above -DI, this point is the maximum price of the intersection day. If + DI drops below -DI, ??this point is the minimum price of the intersection day.
The extreme point is then used as the level of entry into the market. So, after the signal to buy (+ DI rose above -DI), it is necessary to wait until the price rises above the extreme point, and only after that buy. If the price does not manage to overcome the level of the extreme point, you should keep a short position.
Calculation of Average Directional Movement Index – ADX Technical Indicator
ADX = SUM [(+ DI – (-DI)) / (+ DI + (-DI)), N] / N
N is the number of periods used for the calculation;