ADX-DMI

General Description

The ADX is a helpful trend indicator.  The Average Directional Movement (ADX) is a momentum indicator developed by J. Welles Wilder. The ADX is designed to measure if a market is trending and to what extent. The Directional Movement Index (DMI) is another momentum indicator developed by Wilder. It is designed to determine whether a trending or non-trending pattern exists in a market. 

This indicator measures-- regardless if the direction of price movement is in an up or down trend-- the strength of the trend. The higher the value the stronger the trend.  When the ADX is moving higher, the market is in a trend mode.  The trend can be either up or down.  The +DMI and -DMI identify which direction the trend is going.  When the +DMI is above the -DMI the market is stronger.  Conversely, if the -DMI is above the +DMI, the market is weaker.  By identifying when the ADX turns up, in either situation (stronger or weaker), a potential beginning point of a trend can be identified.  Subsequently, when the ADX keeps turning up, a continuation of a trend can be identified.  A setting of 4 may be more choppier but will identify more potential opportunities.  A setting of 14 smoothes out the signals.  Welles Wilder, the developer of the DMI, suggests what he calls the 'extreme point rule'. This rule states, "On the day the +DMI crosses above or below the -DMI, don't take the trade. Just take note of the high or the low of the day.


 The ADX-DMI is actually three separate indicators.

1. The ADX indicates the trend of the market. This is typically used as an exit signal.
2. The +DMI measures the strength of upward pressure.
3. The -DMI measures the strength of downward pressure.