ADX/DMS or ADX Indicator Formula, Strategy

ADX/DMS Indicator

In this series, I will start discussing all the major technical indicators one by one. The first indicator on Zerodha Kite is ADX/DMS, so I will start on the ADX Indicator on Zerodha Kite and also touch the uses on some other popular platforms. What is the full form of ADX/DMS? The full form of ADX is the Average Directional Index and the full form of DMS is the Directional Movement System.

How to Add the ADX/DMS Indicator On Zerodha Kite?

ADX/DMS Indicator On Zerodha Kite
  • Now you can see the ADX/DMS indicator attached in the chart.
  • The default settings are ADX Period of 14 and Smoothing Period of 14. See the image below.
Average Directional Index Zerodha

ADX Indicator on Other Platforms

The average directional index can be added to other terminals too. Here in the next example, we will see how we attached this indicator on the Upstox Pro terminal.

Here also you need to select ADX/DMS from the STUDY TEMPLATES. The default period is again 14 and the smoothing period is 14 here as well. You can select the SERIES, SHADING and HISTOGRAM options. Also, you can change the colors of the +DI and -DI line. See the image below to understand.

ADX/DMS Indicator Upstox

How To Trade With The ADX/DMS Indicator On Zerodha Kite?

  • The ADX/DMS indicator consists of 3 components.
  • The +DI or PDI line – shown on green color.
  • The -DI or MDI line – shown on red color.
  • The ADX line – shown in grey color.
  • The PDI and MDI lines give buy and sell signals and the ADX line shows the trend strength.

Buy / Sell Signals From The ADX/DMS Indicator

  • PDI line crossing above the MDI line is a buy signal.
  • PDI line crossing below MDI line is a sell signal.
  • The ADX line rising is a trending market.
  • When the ADX line is above 25 and rising it is a properly trending market. The higher the ADX value the greater the trend strength.
  • On the other hand ADX line falling and below 25 denotes a range.

So a trader can change his / her trading style using the ADX/DMS. When the PDI is above MDI with a rising and high ADX reading he should consider only buy orders (either buy on breakouts or buy the pullbacks). And when the PDI is below the MDI with a rising and high ADX reading he should only consider short-selling orders (either short sell on breakdowns or short sell on pullback rallies).

In a lower ADX reading below 25 or best below 20/15, a trader should employ range trading techniques. He can buy on dips as well as short sell on rallies. Both the methods can be used on intraday (5/15 minutes chart) or swing trading (hourly / daily / weekly charts).

Average Directional Index Chart
A high reading of ADX in JUBLFOOD. PDI is above MDI – the stock is in a strong uptrend. Buy the breakouts as well as buy the pullbacks.

ADX Indicator FAQ

What is ADX DMS indicator?

ADX stands for the average directional index. The indicator consists of 3 components. One is the ADX line and the other two are +DI or PDI and -DI or MDI. PDI crossing MDI above is the buy signal and PDI crossing MDI below is the sell signal. On the other hand, the average directional index line does not indicate any directions. Rather it is used to measure the trend strength. This indicator gives a clue to the overall strength of the trend. If the average directional index is high and rising the trend is strong and if it is low and falling the trend is weak.ADX Indicator

How good is ADX indicator?

The average directional index is a highly accurate indicator in measuring the trend strength. To understand the actual direction in the market use some trend following indicator and use ADX in addition to it to time your entry and exit.

How do you read an ADX indicator?

In general, the average direction index value above 25 is considered a strong trend. Furthermore, if the ADX is rising it is also the sign of a trending market. On the other hand, if the indicator is decreasing and especially if it hovers below 25 is considered as a rangebound market.

Is ADX a lagging indicator?

Actually average directional index can both be used as a leading as well as lagging indicator. As the trend unfolds the indicator starts rising. This is where it is used as a lagging indicator. On the other hand, a low ADX for a prolonged time can indicate that the market can break out soon. Here traders can take an entry on a break of the upper or lower range. Here ADX is used as a leading indicator.

Suggested Reading

Charles LeBeau has a very nice video tutorial on this subject. He has explained ADX trading in a simple and effective manner. I have provided his 44-page presentation below. You can unlock the download link of the presentation file by using any social share icons below.

I hope the presentation of Charles LeBeau will help you in identifying exact entries and exits using the average directional index and average true range indicator. You can buy the full video course from Amazon if you wish.

Conclusion:

The PDI and MDI lines are used for generating buy/sell signals whereas the ADX line is used only to judge trend strength. Remember, a high ADX does not denote a direction, it only denotes the current trend (can be either UP or DOWN) is strong.

Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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