Average Directional Movement Index Rating
Parameters
Periods The period setting determines the number of data points (e.g., days) used in calculating the ADXR. The ADXR is essentially an averaged version of the ADXR, providing a smoother, more stable measure of trend strength.
Style: These settings allow you to customize how the ADXR indicator is displayed on the chart, including the panel placement, line style, and color.
The Average Directional Movement Index Rating (ADXR) indicates trend strength derived from the Average Directional Movement Index (ADX). The ADXR smooths the ADX by taking the average of the current ADX and the ADX from a selected number of periods ago (often 14 periods), which enhances the indicator\'s stability and can provide a clearer picture of the trend\'s strength over time.
How ADXR Works: The ADXR is part of the Directional Movement System, also developed by Welles Wilder. To understand the ADXR, one must first understand that it is closely tied to the ADX.
Calculate the ADX: Before computing the ADXR, the ADX must be calculated. The ADX itself is derived from two other indicators, the Plus Directional Indicator (+DI) and the Minus Directional Indicator (-DI), which are based on the Directional Movement (+DM and -DM) and the True Range of the prices. These indicators are then smoothed over a period (usually 14 days), and the ADX is derived by computing a moving average of the Directional Index (DX).
,Calculate the ADXR: The ADXR is the average of the current ADX value and the ADX value of a specified number of periods ago (often 14 periods). The formula is
ADXR = (Current ADX + ADX \'n\' periods ago) / 2
Key Aspects of ADXR:
Trend Strength Measurement: Like the ADX, the ADXR measures the strength of a trend but does not indicate its direction. An ADXR rising above a certain level (often 25) indicates a strong trend, while below this level can suggest a weak or consolidating market.
Trend Quality: Because it averages the current ADX with a past ADX value, the ADXR can filter out some of the ADX\'s potential volatility, offering a smoother representation of trend strength.
Lagging Indicator: The ADXR is a lagging indicator that reflects the strength of historical trends and potentially lags behind real-time price action.
Application of ADXR: The ADXR is used by traders to judge the quality of the current trend. A rising ADXR, irrespective of the level of the ADX, suggests that the trend is strengthening. If the ADXR declines, the trend may weaken, signaling traders to be cautious with trend-following trades.
Limitations:
Delayed Signals: The smoothing effect can delay the signals, making the ADXR less responsive to recent trend changes.
Trend Direction: The ADXR does not provide any information about the direction of the trend. Traders must use other indicators or chart patterns to determine the trend direction.
Volatility: The ADXR does not account for the volatility of price movements, which can be an essential factor in assessing the risk of a trade.
Conclusion: The ADXR is a trend strength indicator that complements the ADX by smoothing out its results to provide a more stable view of the trend\'s vigor over time. It is beneficial in conjunction with the ADX to confirm whether the trend is gaining or losing strength. However, due to its inherent lag, it is best used as a part of a broader analytical framework alongside momentum indicators and price action analysis. The ADXR can guide traders in deciding when for initiating or terminating positions based on the strengthening or weakening of market trends.