The Average Directional Index (ADX) is a tool used by traders to determine the strength of investment trends. It appears on a chart with two other lines, the negative and positive direction indicators, and can help investors choose the best time to exit an investment. The ADX can also establish a pattern to determine the peak hour for selling. Created by J. Welles Wilder, Jr., the ADX is one of several technical indicators used in technical analysis software.
The Average Directional Index is a tool used by traders to determine the strength of investment trends. It appears on a chart with two other lines: the negative direction indicator and the positive direction 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 that can help an investor choose the best possible time to exit an investment.
In general, an average directional index can show an investor whether a trend is catching on or starting to fade. The index measures the overall strength of a trend regardless of its market position. 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 both positive and negative directional indicators. The markers 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 typically appears as a single black line at the bottom of the graph.
One of the benefits 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 waxes and wanes with the market, it is possible that its fluctuations are not specifically related to the trend. When a trend appears to move in patterns separate from the market, then the move is more likely to be a reaction to that trend.
An average directional index can also establish a pattern that can allow an investor to determine the peak hour for selling. For example, a trend may have a fairly regular occurrence of dips and peaks. After observing this pattern, the investor can predict when the trend will peak again and plan to sell at that point. While there is still some risk involved, the investor is more likely to pick the most advantageous 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 developed over the next several years.
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