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Average Directional Movement (ADX) and Directional Indicators (DI+ and DI-)

Average Directional Movement is a momentum indicator developed by J. Welles Wilder. The ADX attempts to measure the extent to which a market is trending. This indicator measures the strength of the trend, regardless of direction; the higher the value, the stronger the trend.
The Directional Indicator is a momentum indicator that attempts to quantify the trending or directional behavior of a market. Directional Indicator is defined as the largest part of the current period price range that lies outside the previous period price range. If the larger excess is above the previous period high, it is considered a Positive Directional Indicator, or +DI. If the larger part of the current range is below the previous period low, it is considered a Negative Directional Indicator, or -DI.

Analysis methods for ADX, DI+ and DI-
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The ADX can be used in conjunction with the Direction Indicator (+DI, -DI) to produce a complete trading system. This system consists of three rules: the Crossover Rule, the Extreme Point Rule, and the Turning Point Rule.

1.The Crossover Rule
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The Crossover Rule states to establish a long position whenever +DI crosses above –DI. It states to establish a short position whenever -DI crosses above +DI.

2.The Extreme Point Rule
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Identify a trigger point at the extreme price on the day the lines cross. If it were a bullish crossing (+DI cross above -DI), you would wait for the price to rise above this extreme price (the high price on the day the lines crossed) on a subsequent day. If it's a bearish crossing (+DI crosses below -DI), the extreme point is defined as the low price on the day the lines cross. You would then wait for price to break below this extreme price on a subsequent day before entering into a short position.

3.The Turning Point Rule
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The Turning Point rule first requires the ADX to be above both the DI lines (+DI and -DI). When the ADX turns lower while in this area, the market often reverses the current trend. This is a warning signal that the market is about to change direction.

Detailed analysis, interpretation and preferences
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The period used for ADX can be set up in the preference dialog. By default the period is 14 days.
In the following sample, this indicator helps to identify a situation with no trend followed by a bearish trend, a reversal situation and finally a bullish trend.

Tips & Tricks
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According to the developer of this system, you should stop using any trend following system when the ADX is below both DI lines, as no discernable trend exists.

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