Average Directional Movement Index indicator
Average Directional Movement Index is a fairly successful combination of a trend indicator and an oscillator. True, at first it seems complicated, the large number of lines and signal conditions is confusing, so novice traders try to avoid it. But in vain. It is not just that it is included in the number of basic MT4 instruments.
Trading with the ADX indicator
Average Directional Movement Index was originally developed by J. Wilder in 1978. During this period, technical analysis developed at an especially fast pace, therefore, many basic Metatrader tools were created precisely in the 70s and 80s. Later, it was repeatedly refined, turning into what you can see in the screenshot below.
The indicator is placed under the price chart and consists of three lines:
- Positive directional indicator + DI. In a simplified form, the current point is plotted as the ratio of the high of the last candlestick to the high of the previous one. It is not worth delving into the full calculation formula.
- Negative Directional Indicator -DI. The calculation principle is similar with the only difference that the minimum values of the candles are compared.
Both lines are smoothed using an exponential moving average.
- ADX indicator. It is also built on the basis of the EMA, but the values of the first two lines are taken into account. The greater the distance between the dotted lines of the indicator, the higher the solid ADX line rises.
Despite the fact that in MT4 the Average Directional Movement Index is in the trend category, it is also considered to be an oscillator. The amplitude movement of the main line shows the strength of the trend. Like oscillators, the indicator has a range of movement, moving between “0” and “100”. It is generally accepted that a value below “20” indicates a flat, “20-50”, a mild trend that can change direction at any time. The closer the indicator is to the 100th level, the stronger the trend. But it is precisely the approach to it that means a signal for an imminent reversal. In practice, the value of the indicator “50” already indicates the beginning of a strong trend, and it rarely reaches the mark “80”.
The Average Directional Movement Index has almost no settings – the period and type of prices used in calculating prices. The shorter the period, the more sensitive the indicator to price changes. This eliminates delays, but adds false signals.
Interpretation of signals:
- If the + DI line is above the -DI line, the trend is upward. If lower – descending.
- The moment of convergence of all three lines at one point is considered a weak signal. The moment of intersection of the main line with one of the additional lines (while the second line is on the opposite sides of the range) is a strong signal.
- The main line goes up and crosses the level “40” – a signal to open a long position. If it goes down – accordingly, a signal to open a short position.
These examples of signals are quite general, so it makes sense to select signal levels separately for each currency pair. As well as the period. Average Directional Movement Index leaves a positive impression. To get acquainted with technical analysis, the indicator can be used as the main one, but on a real account it is better to add another trend instrument to it. Or, for example, do as described in this review – add MACD.