Directional Movement System Part 2

High ADX readings indicate that the security is in a trending mode and low readings indicate a lack of directional movement and are more indicative of trading range markets.

Normally, the DIs are overlaid in the same chart panel. The standard, or default, time span is 14 periods. Crossovers of the DIs are then used as buy and sell signals.

There is one other important indicator incorporated in this system and that is the Average Directional Index (ADX). The ADX is simply an average of the + DIs and - DIs over a specific period. In effect, it subtracts the days of negative directional movement from the positive ones.

However, when the - DI is greater than the + DI, the negative sign is ignored. This means that the ADX only tells us whether the security in question is experiencing directional movement or not. Again, the normal default time span is 14 days.

The ADX is calculated in such a way that the plot is always contained within the scale of 0 to 100. High readings indicate that the security is in a trending mode (it has a lot of directional movement), and low readings indicate a lack of directional movement and are more indicative of trading range markets. Unlike other oscillators, the ADX tells us nothing about the direction in which a price is moving, only its trending or non trending characteristics. Use other oscillators for this task.