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When you buy stocks it is very important to understand average directional index.
Average Directional Index |
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The Average Directional Index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument. ADX has become a widely-used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms. CalculationThe ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with an exponential moving average. To calculate +DI and -DI, one needs price data consisting of high, low, and closing prices each period (typically each day). One first calculates the Directional Movement (+DM and -DM):
After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:
The exponential moving average is calculated over the number of periods selected, and the average true range is an exponential average of the true ranges. Then:
Variations of this calculation typically involve using different types of moving averages, such as a weighted moving average or an adaptive moving average. InterpretationThe ADX does not indicate trend direction, only trend strength. It is a lagging indicator; that is, a trend must have established itself before the ADX will generate a signal that a trend is underway. ADX will range between 0 and 100. Generally, ADX readings below 20 indicate trend weakness, and readings above 40 indicate trend strength. Average Directional Index Topic - Technical AnalysisTechnical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume. |
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