Average Directional Movement Index Rating
This lesson will cover the following
- Explanation and calculation
- How to interpret this indicator
- Trading signals, generated by the indicator
The Average Directional Movement Index Rating (ADXR) is an element of the Directional Movement System, developed by J. Welles Wilder. ADXR quantifies the change in momentum of the Average Directional Index (ADX). This indicator is the result of adding two values of the Average Directional Index (the current ADX value and the ADX value n-periods ago), after which dividing this sum by two, or:
ADXR = (ADX + ADX n-periods ago) / 2
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The additional smoothing makes the ADXR respond to changes in a trend to a lesser extent compared with the ADX.
The ADXR is used in the same way as the ADX – the higher the ADXR reading, the more resilient the trend. This indicator is used, so that a trader can identify if price movement is directional enough to be worth trading. A trend-following strategy can be used, when the ADXR shows a reading higher than 25. ADXR values above 40 are indicative of very strong trending environment, while values below 20 suggest that the market is in a trading range.
ADXR is a lagging indicator and will usually provide signals after the ADX does. Some technical analysts prefer to use the ADXR in the form of a signal line applied to the ADX. In case the ADX moves above the ADXR, they will consider this as a signal to buy. In case the ADX moves below the ADXR, they will consider this as a signal to sell.