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Registered User
Joined: 10/7/2004
Posts: 5
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Are there recommended or preferred settings for DX period and average for ADX? Thanks.
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Worden Trainer
Joined: 10/7/2004
Posts: 65,138
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The trainers can't give setting, interpretation or investment advice, but I'll move this topic to the Stock and Market Talk forum so other traders will be more likely to see it and comment.
Average Directional Index (ADX)
Sorting by the ADX indicator
PCF for Wilder's Directional Movement DMI-crossovers
PCF for Wilder's DX, and/or a CI for Wilder's ADX
-Bruce
Personal Criteria Formulas
TC2000 Support Articles
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 Gold Customer
Joined: 11/11/2006
Posts: 359
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CLYD: Wilder recommends that a setting of 14 for the DMI and ADX both be used. The indicator it's self does not seem to be sensitive to minor changes in these numbers, however. Various authors use various periods.
ADX may well be the slowest indicator out there. If used as recommended by Wilder, it will keep you out of most "whipsaws" and keep you in most of the longer up trends.
If you backtest a basket of stocks, one click at a time, you will find that DMI/ADX, used as a trading system, is about as good as anything out there. Not all the time, not every time.
Remember to use the Extreme Point Rule.
There are several sites and information about ADX that can be Googled
Mammon
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Registered User
Joined: 9/22/2005
Posts: 849
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mammon
Forgive my ignorance but. what is the Extreme Point Rule?
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Gold Customer
Joined: 11/11/2006
Posts: 359
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Good Morning, BCraig!
When Wilder presented his ADX/DMI procedure, part of it was what he called "The Extreme Point Rule".
For a buy signal, the +DMI needed to cross above the -DMI. On the day of crossing, the High of that day is the Extreme Point. The actual buying of the equity did not take place untill price has gone ABOVE this extreme point. Even if it took several days.
For selling, the -DMI crosses below the +DMI. The low of the day on the day of crossing is the Extreme Point. Do not sell the stock untill price has fallen below this extreme point. Even if it takes several days. And it often will.
A complaint about the ADX/DMI as a trading system stems from the fact that it will often take quite a bit of gain before you are in, and quite a bit of loss before you get out. The upside? The Extreme Point Rule will keep you out of very many " Whipsaws"
Other uses of ADX/DMI:
If market is down-trending and the ADX if BELOW both the + and - DMI and starts to move up, when it (The ADX) crosses the falling -DMI, some will take this as an entry point. In particular if the ADX has spent some time below 10 or 15.
In a up-trending market, once the +DMI has fallen below the rising ADX, this indicates that the up-trend is beginning to weaken. Watch ADX. When it is quite high, say, over 35 with the +DMI below it, it will reach a point where it will break to the downside. Many use this as an exit point, or take partial profits.
When the market is very weak, the -DMI will be above the ADX. Same thing. The -DMI will cross below the ADX and you can wait for the ADX to break sharpely to the downside and take that as an entry signal.
Again, the ADX should be quite high. Say 35. The more the better, but you will rarely see it above 60 or so.
Hope this helps. ADX/DMI can be somewhat complicated, but it's worth playing around with some, and doing some backtesting.
Mammon
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Registered User
Joined: 9/22/2005
Posts: 849
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Thanks, mammon
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