Hi there
Anyone know of a good source to explain how to calculate ADX?
thanks
Rockglen
Hi,
ADX or ‘Average Directional Index’ was developed by J. Welles Wilder Jnr. and was first published in his book ‘New Concepts In Technical Trading Systems’ in 1978. The calculation of ADX is complicated and I would STRONGLY advise you (if you’re THAT interested of course) to purchase, or find (as most people do nowadays), the book. I have not, to date, found the CORRECT calculation for ADX being published on the Internet (I purchased the book years ago and for a time it was my preferred point of reference and, as a matter fact, there is an entire thread dedicated to Wilder’s trading systems, as detailed in the book, on this very site although you’re not going to find the calculations there). EVEN the calculation of the ‘standard’ ADX that is supplied with Metatrader is NOT correct (and when I say that these ADX calculations are NOT correct I mean that they are NOT calculated as per Wilder’s formula and sometimes give VERY different signals from Wilder’s ‘original’ ADX).
Regards,
Dale.
Hi Dale…have you by chance looked into the “ADXcellence” system by Dr. Charles and Candy Schaap?
Hello,
For some very odd reason it ‘rings a bell’. Put it this way: I think somebody TOLD me about it but I don’t ever remember actually READING it (the book).
Have YOU looked at it? If so: what do YOU think as a matter of interest (as you know: my experiences with ADX are NOTHING to ‘write home about’)!!! LOL!!!
Regards,
Dale.
No I haven’t either. ADX used to be one of my pet indicators during my stint with TRO’s NLA thread. I’ve put it aside for now but it’s been one of those “things” that I seem to come back to…lol…like fibs.
However, grayghost has and he’s trading with it 301 Moved Permanently but I don’t think it’s really about how it’s calculated, and rather how it’s used in trading. I’m naively going so far as to say how much difference can it make how it’s calculated? 
Good morning Sweet Pip,
Now that I come to think of it: THAT (‘grayhost’s’ thread) is where I heard of ‘ADXcellence’.
After my reading your post last night I ‘scoured’ the Internet looking for the book (I cannot tell a lie i.e. I was looking for a .PDF download of it). While I could not find one (well: not on a site that I trusted i.e. only recently have I had to reinstall my entire main workstation due to a virus and it’s not something I wish to have to do in a hurry again) I did manage to find some ‘snippets’ i.e. certain chapters that have been published on the Internet by the author as ‘teasers’. I don’t know what to say. As you know: I (we) spent more than a year ‘pushing and pulling’ ADX and in the chapters that I DID find last night I’m not seeing anything new or anything that we did not try. Perhaps in the ‘withheld’ chapters there are some ‘secret ADX techniques’ or ‘alternative interpretations’ of ADX but they’d have to be REAL ‘alternative’ for ME to justify paying almost $180 for the book when Wilder’s original only cost me $79!!! LOL!!!
The above being said: since my ‘fall from grace’ last year I’ve had no choice but to sit back and reassess myself and my trading systems and trading methodologies and it’s become blatantly clear that my spectacular ‘wipe-out’ had very little to do with Wilder or trading systems or trading methodologies and a LOT to do with me ‘getting ahead of myself’ and taking unnecessary risks so I cannot in all honesty say that ADX is NOT ‘worth its salt’. The very BIGGEST downfall of ADX (as with ALL trend following indicators) is what happens when the instrument being traded is NOT trending. WHO KNOWS? Maybe SOMEWHERE in ‘ADXellence’ this issue has been SATISFACTORILY addressed!!!
I suppose, to be honest, the BIGGEST difference between Wilder’s ADX calculation and the ‘other’ ADX calculations is the fact that Wilder uses his own ‘smoothing’ method (which can be quite easily simulated but for some or the other reason is ignored by most). We found that this made a HUGE difference when it came to eliminating ‘whipsaws’ i.e. a ‘NON Wilder smoothed’ ADX is very ‘choppy’. Of course: this is more of an issue if you’re trading Wilder’s DMS or ‘Directional Movement System’ (ADX is the indicator and the DMS is the system used to trade with ADX) i.e. it may NOT be such an issue if you’re using ADX purely as an indication of the direction of the trend and the strength of such trend (if there is a trend AT ALL). Of course there is then also the added issue of the ‘ideal’ period to be used (Wilder’s default is 14) and, of course, the temptation to ‘curve fit’ ADX by ‘messing’ with the period is ever present.
Notwithstanding the above: what we DID prove was that there were indeed periods when Wilder’s DMS was worth ABSOLUTE FORTUNES (2007 - 2008) BUT ‘tag’ the preceding periods (2004 - 2006) to these periods and you would have been very lucky to break even let alone make a profit in SPITE of the massive gains possible during the period 2007 - 2008 (we stopped testing at the end of 2008 so what’s happened in 2009 could quite possibly have contributed to an OVERALL profit for the period 2004 - 2009). Put another way: Wilder’s DMS OVER A VERY VERY LONG PERIOD OF TIME is, in all probability, highly profitable. The problem: NO trader that I know is going to stick with a system that consistently loses money for years in the HOPE that their ‘DMS ship’ is going to ‘come in’ one day.
As you probably know: I (ME) have relegated myself to trading breakout systems and (THOSE OTHER) ETF Trading Systems. Fortunately: there is NO subjective interpretation necessary with these systems unlike there is with a system such as Wilder’s DMS or an indicator such as ADX. There are probably as many different subjective interpretations of ADX itself as there are traders in the business!!!
Regards,
Dale.
thanks folks
I’ve ordered Wilder- I’d hoped to be able to uncover some dummies guide on the internet!! but from your guidance, I’ve resigned myself to wading through the book.
my thoughts were to not to use ADX to generate signals rather to use it (or derivatives) to stack rank multiple equities already displaying Entry signals.
It would tell me which equity is displaying strongest trend e.g. those closest to 30.
I’m not familar with your story Dale, —care to share it? I’m a mere fledgling so I’m always looking to learn from the more experienced.
Rockglen
Hi @dpaterso, @Sweet_Pip what is your opinion on which charting platform offers a reliable ADX?
You say MT4 offers a different approach compared to Wilder’s calculation, but does that mean you cannot use MT4’s? Or is it equally reliable?
I am both fan of Tradingview and MT4 for charting, but for same charts, timeframes, amount of iterations taken into account, both give complete different values…
So I’m currently riddled on which one to use.
Many thanks in advance for your opinion!!
Cheers and good luck trading,
Matthias.
I thank you all because with this discussion, I can be smarter.