ADX was developed by Welles Wilder.The ADX is a indicator which indicates whether market is trending or moving in a range. ADX tell about a market’s strength. This can help in avoiding weak market and staying in market for longer when it is trending to enhance gains. It doesn’t tells anything about market prices. It just tells about the strength of the current trend. It indicates the directional strength rather than it strength.
Directional Movement
Directional movement is defined as the difference between the highs and lows of a particular bar that falls outside the range of a previous bar. In terms of a daily chart, if price close above the previous close, it will be a positive directional movement and if it closed below previous close, then it will be negative directional movement.
The Directional Indicator (DI)
Welles Wilder developed directional indicator. Absolute difference in price movement fails to take into account the proportion of the movement.Wilder decided that price movements are better described in ratios and not numbers.DIs are calculated over a number of days. Wilder used 14 days for this. The DIs provide the timing signals in the directional movement system.
Conclusion
The primary thing in technical analysis is to look for high ADX.
1. A high ADX value defines a strong trend; the trend could be either up or down.
2. A low ADX shows a consolidation; such markets are quite volatile.
DI timing signals
1. Long Trades can be initiated when +DI moves over -DI.
2. Short trades should be done when -DI moves below +DI.
Though, it should not be used when ADX is very low.
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