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What is the average trend indicator ADX?How to use the ADX indicator?

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Average trend indicator, English is Average Directional Index, Abbreviation ADX, Is a technical indicator for measuring the intensity of price trends.

The average trend indicator was proposed by Welles Will in 1978 to measure the strength of the stock price trend.It determines whether the market has a significant trend by calculating the direction and size of the price movement.

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How to calculate the average tendency indicator?

The ADX index includes three parts: main ADX cable,+di (positive direction index) and -Di (negative direction index).The calculation process of the average trend indicator is as follows:

1.Calculate the real fluctuation range(( True Range)

The scope of real fluctuations, English is True Range, abbreviated TR, is an indicator that measures price volatility.

You need to calculate the maximum value of the following three values:

  • The difference between today’s highest price and the lowest price today is marked as DIF1
  • The difference between the highest price today and the closing price yesterday (take absolute value), marked as DIF2
  • The minimum price today and the closing price of the previous day (take absolute value), marked as DIF3

so,

TR = MAX (DIF1, DIF2, DIF3)

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Finally, calculate a certain cycleN(For example, 14 days), the moving average of the real fluctuation range is marked as TRNEssence

2.Calculation+dm and-dm(Move direction)

The full name of DM is Directional Movement, which is moving in Chinese, including +DM and -DM, which is used to measure the trend strength of price.

+DM is an index that moves in the positive direction and is used to measure the intensity of upward trends; -DM is an index that moves in the negative direction to measure the strength of the decline;

In order to calculate +dm and-dm, we first define two values:

  • Today’s highest price-yesterday’s highest price, marked as DF1
  • The lowest price yesterday-the lowest price today, marked as DF2

Then, the calculation method of+dm and-dm is as follows:

  • If df1> df2,+dm = df1; -dm = 0
  • If DF1

Finally, calculate a certain cycleN(For example, 14 days) of the +dm moving average (marked as +dmN), And -DM’s moving average (labeled -DMNCure

3.Calculation +di and-di (direction index)

DI, the full name is Directional Indicator, Chinese is a “direction indicator”, and it is also used to measure the strength of rising price or decline.

DI can be from TR in the first and second stepsN,+DmN, -DmNCalculate.

+Dm = (+dmN/ TrN) X 100

-Dm = (-dmN/ TrN) X 100

+DI measures the intensity of the upward trend, while the -DI measurement market is in the decline trend.

By comparing the value of+di and-Di, the direction and strength of the market trend can be analyzed.

When+di is higher than-DI, it indicates that the rise in the rise is dominant; on the contrary, when the-DI is higher than+di, it indicates that the decline trend is dominant.

4.4..Calculate the average trend index(ADX)

Before calculating the average trend index, you must first calculate the trend index DX (Directional Index), and then take the moving average of DX to get ADX.

The trend index is calculated from +di and-di.The formula is as follows:

DX calculation formula

Finally, calculate a certain cycleN(Such as 14 days) Trend index(DX) The moving average, that is, the average tendency index, marked as ADX.

The average trend index is used to measure the strength of the price trend, but does not directly display the direction of the trend.

How to use the average trend index adx?

The average trend indicator (ADX) itself only represents the strength of the trend, and cannot indicate the direction of the trend.

  • When ADX> 20, it means that the price has a significant trend;
  • When ADX <20, the trend of price is not obvious.

At the same time, rising ADX indicates that the trend has strengthened, and the decreased ADX indicates that the trend has weakened.

When using, you can combine +di and-di to determine the direction of trends.

  • When+di is higher than -Di, the upward trend is displayed;
  • When -Di is higher than+di, it shows a downward trend.

If +di and-di start to converge, it means that the current trend is developing in the direction of the DPRK; if +di and-di start to diverge, it means that the current trend is strengthening.

What are the limitations of the average trend index?

The use of average trend indexes to determine the strength of price trends is also limited.

The main limitations are its lag.ADX is based on historical data, so its reaction may lag behind the actual changes in the market.

At the same time, in a market with a small fluctuations or no obvious trend, ADX may not be effective enough.

What we emphasize most is that we cannot just use one technical indicator as the basis for buying and selling, and we need to comprehensively consider other technical indicators and perform fundamental analysis.

For example, you can put the ADX index and trend indicator (for example, Moving average), Momentum indicator (for example, Relatively strong indicators, Random oscillator), and the transaction volume indicator (for example, Balance transaction volume index) Combine.

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