The Average Directional Index (ADX) is used by traders to determine the strength of reversal trends. It measures the overall strength of a trend and can reveal more about its relationship to the market. It can also establish a pattern to determine the peak time to sell. Created by J. Welles Wilder Jr. in 1978.
The Average Directional Index is a tool used by traders to determine the strength of reversal trends. It appears on a chart with two other lines: the negative directional indicator and the positive directional indicator. Together these lines are known as Directional Movement Indicators (DMI). The relationship between these two indicators can help a trader determine the average directional index. Over time, a pattern will develop in the index, which can help an investor choose the best possible time to exit an investment.
In general, an average directional index can show an investor if a trend is accelerating or starting to fade. The index measures the overall strength of a trend, regardless of its position in the market. This gives the trader the opportunity to sell an asset before it falls and becomes a liability.
A typical average directional index will be plotted on a chart with the positive and negative directional indicators. Indicators are drawn as two lines with different colors running horizontally across the top. The relationship between these lines is used to calculate the index, which usually appears as a single black line at the bottom of the chart.
One of the advantages of the average directional index is that over time it can reveal more about the nature of a trend and its relationship to the market. If the strength of the trend rises and falls with the market, then its fluctuations may not be specifically related to the trend. When a trend appears to be moving in separate patterns from the market, then the movement is more likely a reaction to that trend.
An average directional index can also establish a pattern that can allow an investor to determine the peak time to sell. For example, a trend may have a fairly regular occurrence of dips and spikes. By looking at this pattern, the trader can predict when he will hit the trend top again and plan to sell at that point. While there is still some risk involved, the investor is more likely to choose the most profitable time to make a move.
American mechanical engineer J. Welles Wilder, Jr. created the average directional index in 1978. It was one of several technical indicators he created during his long technical analysis career. Many of Wilder’s innovations became elements of technical analysis software that was developed in later years.
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