|Average Directional Movement is a momentum indicator developed by J. Welles Wilder. The ADX attempts to measure the extent to which a market is trending.
This indicator measures the strength of the trend, regardless of direction; the higher the value, the stronger the trend.
The ADX can be used in conjunction with the
Direction Indicator (+DI, -DI) to produce an complete trading
system. This system consist of three rules: the
Crossover Rule, the Extreme Point Rule, and the Turning Point Rule.
The Crossover Rule
The Crossover Rule states to establish a long position whenever
+DI crosses above -DI, and to establish a short position whenever
-DI crosses above +DI. In RTL, the bullish crossover would be
accomplished with the following scans...
DIPLUS > DIMINUS AND
DIPLUS.1 <= DIMINUS.1
...while the bearish crossover would be accomplished
with this scan...
DIMINUS > DIPLUS AND
DIMINUS.1 <= DIPLUS.1
The Extreme Point Rule
Identify a trigger point at the extreme price on the bar the lines cross. If
it's a bullish crossing (+DI cross above -DI), you would wait for the
price to rise above this extreme price (the high price on the day the lines
crossed) on a subsequent bar. If it's a bearish crossing (+DI
crosses below -DI), the extreme point is defined as the low price on the
bar the lines cross. You would then wait for price to break
below this extreme price on a subsequent bar before entering into a
The Turning Point Rule
The Turning Point rule first requires the ADX to be above both
the DI lines (+DI and -DI). When the ADX turns lower while in this
area, the market often reverses the current trend. This is a warning
signal that the market is about to change direction. This
condition can be discovered with a scan using the following
ADX > DIPLUS AND ADX > DIMINUS AND ADX < ADX.1
AND ADX.1 >= ADX.2
According to the developer of this system, you should stop using any trend following system when the ADX is below both DI
lines, as no discernable trend exists.