ADX and DI

The ADX and DI indicator provides a comprehensive trend strength and direction analysis tool by combining the Average Directional Index (ADX) with Positive (+DI) and Negative (-DI) Directional Indicators.

Usage

The ADX and DI indicator is primarily used to determine the presence and strength of a market trend. Traders can interpret the three components as follows:

• Trend Strength (ADX): The ADX line measures the strength of a trend regardless of its direction. When the ADX is above the user-defined threshold (commonly set at 20 or 25), it suggests a trending market. Conversely, an ADX below this level typically indicates a ranging or sideways market.
• Trend Direction (+DI and -DI): The Directional Indicators specify the trend's direction. When the +DI (green line) is above the -DI (red line), the bullish momentum is dominant. When the -DI is above the +DI, bearish momentum is dominant.
• Crossovers: A crossover where the +DI moves above the -DI can be interpreted as a bullish signal, while a crossover where the -DI moves above the +DI can be interpreted as a bearish signal.

Details

This script is based on the technical framework developed by J. Welles Wilder Jr. The calculation involves several steps to quantify price movement:

1. Directional Movement (DM): The script calculates +DM and -DM by comparing the current high and low to the previous high and low.
2. True Range (TR): It determines the greatest of the current high minus low, the absolute value of the current high minus the previous close, or the absolute value of the current low minus the previous close.
3. Smoothing: The DM and TR values are smoothed over the selected lookback period using Wilder's smoothing technique.
4. Directional Index (DI): The smoothed +DM and -DM are divided by the smoothed True Range and multiplied by 100 to create the +DI and -DI lines.
5. Average Directional Index (ADX): The script calculates the Directional Index (DX) as the absolute difference between the DIs divided by their sum. The ADX is then derived as a simple moving average of the DX.

Settings

• Length: The lookback period used for the smoothing of the True Range and Directional Movement, as well as the calculation of the ADX. The standard default is 14.
• Threshold: A horizontal reference level used to identify when a trend has reached a significant level of strength.

FAQ

How do I interpret the ADX and DI lines together?

A strong uptrend is typically identified when the ADX is rising above the threshold and the +DI is above the -DI. A strong downtrend is identified when the ADX is rising above the threshold and the -DI is above the +DI.

What does it mean when the ADX is falling?

A falling ADX indicates that the current trend is weakening. This does not necessarily mean a trend reversal is imminent, but rather that the market may be entering a period of consolidation or range-bound behavior.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.