The Average Directional Movement (ADX) Index measures the strength of an investment or stock trend. Knowing how to calculate ADX will help you in choosing the strongest investment trends. The formula for calculating ADX was proposed by Welles Wilder in the year 1978 and is widely used to calculate ADX even today. You can either use the formula stated by Welles and calculate ADX manually or use Excel sheet for calculating it.
Calculating ADX manually
Calculating ADX manually
- First calculate the auxiliary indicators +DM and –DM (directed movement). The difference between today’s and yesterday’s high corresponds will give you auxiliary indicator +DM, while the difference between today’s and yesterday’s low corresponds will give you the auxiliary indicator –DM on “outside days”.
- On “Inside days” both the values for +DM and –DM are considered to be zero since these values are not considered.
- Calculate the True Range (TR). This is always positive. True range is the maximum or largest of the values
Today’s High – Today’s Low
Today’s High – Yesterday’s Close
Yesterday’s Close – Today’s Low
You need to compute this for at least fourteen days and select the one which has a maximum value.
- Calculate the upward pointing directional indicator +DI and –DI. To calculate this divide the +DI value of last fourteen days with the TR value of last fourteen days and to calculate –DI value divide the value of last fourteen days with the TR value of last fourteen days.
- Now, calculate DMI by placing the values of +DI and –DI in the formula given above. It is the sum of the +DI and –DI values divided by the sum of +DI and –DI.
- To calculate ADX, multiply DMI with the smoothing constant “n”.
Calculating ADX using Excel
- If you want to calculate ADX using Excel sheet, note down today’s and yesterday’s high corresponds for last fifteen days and the low correspond for today and yesterday.
- Now, compute +DM by inserting the formula (Result will be displayed in P1) “=((14*J1+13*J2+12*J3+11*J4+10*J5+9*J6+8*J7+7*J8+6*J9+5*J10+4*J11+3*J12+2*J13+1*J14))/105”
- Calculate the value for –DM inserting the formula (Result will be displayed in Q1)
“=((14*K1+13*K2+12*K3+11*K4+10*K5+9*K6+8*K7+7*K8+6*K9+5*K10+4*K11+3*K12+2*K13+1*K14))/105”
- Calculate TR using the formula (Result will be displayed in R1)
“=((14*O1+13*O2+12*O3+11*O4+10*O5+9*O6+8*O7+7*O8+6*O9+5*O10+4*O11+3*O12+2*O13+1*O14))/105”
- Calculate directional indicators +DI and –DI using the formula “=P1/R1” and “=Q1/R1”. +DI will be displayed in column S while –DI will be displayed in column T.
- Now, calculate the average absolute difference using the formula “=abs (S1-T1)”. You will get this in column U.
- Calculate DMI using the formula “=U1/(sum(S1:T1))”. The result is obtained in the column V.
- Finally, calculate ADX using the formula
“=((14*V1+13*V2+12*V3+11*V4+10*V5+9*V6+8*V7+7*V8+6*V9+5*V10+4*V11+3*V12+2*V13+1*V14))/105” in column W.
When you have calculated ADX, you may want to interpret it. You can use the following information to interpret the result obtained
- If the ADX is higher, then it indicates that the underlying trend is stronger.
- ADX simply indicates the trend intensity, but it does not convey any information about the trend direction.
- A falling ADX shows the end of a trend.
- As long as you see that the ADX is rising, don’t use oscillations.
- You can use ADX as filter between oscillations and trend indicators.
Related Content: