The Average Directional Index and Directional Movement System (ADX/DMS) is a technical indicator which plots the Average Directional Index (ADX) alongside the Plus Directional Indicator (+DI) and the Minus Directional Indicator (-DI).
The -DI measures the strength of a downtrend. It is calculated using the following formula: 100 x Exponential Moving Average of (-DM / Average True Range). In turn, -DM, or Minus Directional Movement is the value of a stock's current low price minus the previous low price.
The +DI measures the strength of an uptrend. It is calculated using the following formula: 100 x Exponential Moving Average of (+DM / Average True Range). In turn, +DM, or Plus Directional Movement is the value of a stock's current high price minus the previous high price.
The ADX is an indicator that helps traders gauge the strength and direction of a trend. It is calculated using the following formula: 100 x Exponential Moving Average of the Absolute Value of (+DI - -DI) / (+DI + -DI).
The Directional Indicators can be used to identify the start of a trend. When the Minus Directional Indicator rises above the Plus Directional Indicator, this could be a sign that a downtrend is beginning. Conversely, when the Plus Directional Indicator rises above the Minus Directional Indicator, this could be a sign that an uptrend is beginning. In addition, The ADX measures the strength of a trend. An ADX value of 20 indicates the existence of a trend, while a value over 40 indicates a strong trend. Taken together, the ADX, +DI and -DI can be used to identify when a new trend is beginning, as well as the strength of that trend. For instance, a strong uptrend could be identified when the Plus Directional Indicator rises above the Minus Directional Indicator and the ADX is above 40. Furthermore, a weak downtrend could be identified when the Minus Directional Indicator rises above the Plus Directional Indicator and the ADX remains below 20.