Wilder's DMI (ADX) Indicator Definition from www.investopedia.com
Introduction
ADX, or Average Directional Index, is a popular technical analysis tool used by traders to determine the strength of a trend. This tool was developed by J. Welles Wilder Jr. and introduced in his 1978 book "New Concepts in Technical Trading Systems". In this article, we will provide a comprehensive guide to the ADX indicator formula in Excel.
Understanding the ADX Indicator Formula
The ADX indicator formula in Excel is based on three lines: the ADX line, the +DI (positive directional indicator) line, and the -DI (negative directional indicator) line. The ADX line measures the strength of a trend, while the +DI and -DI lines indicate the direction of the trend. The formula for each line is as follows:
ADX Line Formula
The ADX line is calculated by taking the average of the difference between the +DI and -DI lines over a certain period of time. The formula for the ADX line is as follows: ADX = (Sum of the past N periods of the absolute value of (+DI - -DI) / N) * 100 Where N is the number of periods used in the calculation.
+DI Line Formula
The +DI line is calculated by taking the difference between the current high and the previous high, and then comparing it to the difference between the current low and the previous low. The formula for the +DI line is as follows: +DI = ((Current high - Previous high) / ATR) * 100 Where ATR is the average true range, which is a measure of volatility.
-DI Line Formula
The -DI line is calculated in the same way as the +DI line, but using the differences between the current and previous lows instead. The formula for the -DI line is as follows: -DI = ((Current low - Previous low) / ATR) * 100
Using the ADX Indicator Formula in Excel
Once you have calculated the ADX, +DI, and -DI lines using the formulas above, you can use them to analyze trends in a particular security. The following are some tips for using the ADX indicator formula in Excel: - A high ADX reading indicates a strong trend, while a low ADX reading indicates a weak trend. - When the +DI line is above the -DI line, it indicates an uptrend, and when the -DI line is above the +DI line, it indicates a downtrend. - When the ADX line is above 25, it indicates a strong trend, and when it is below 20, it indicates a weak trend. - Traders often use the ADX indicator in combination with other technical indicators, such as moving averages, to confirm trends and identify potential entry and exit points.
Conclusion
The ADX indicator formula in Excel is a powerful tool for analyzing trends in the financial markets. By calculating the ADX, +DI, and -DI lines using the formulas above, traders can gain valuable insights into the strength and direction of a trend. To get the most out of the ADX indicator, it is important to use it in combination with other technical indicators and to continually monitor market conditions.
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