Average Directional Movement Index (ADX) is a technical indicator that defines the price trend. It was designed and described in detail by Welles Wilder in his book New concepts in technical trading systems.
This is a very simple trading method, which based on the system of directional movement. It offers a comparison of two direction indicators: the 14-period +DI one and the 14-period -DI. For this purpose, one either puts the charts of indicators one on top of the other, or +DI is subtracted from -DI. Welles Wilder advices to buy when +DI is higher than -DI, and to sell when +DI moves lower than -DI.
Wells Wilder adds to this simple trading method, as he calls it – a rule of points of extremum. It is used to remove false signals and to decrease the number of deals. Regarding the principle of points of extremum, the point of extremum is the point when +DI and -DI cross each other. If +DI raises higher than -DI, this point will be the maximum price of the day when they cross. If +DI is lower than -DI, this point will be the minimum price of the day they cross.
The point of extremum is used then as the market entry level. In this way, after a signal to buy (+DI is higher than -DI) the trader should wait until the price exceeds the point of extremum, and only then to buy. But, if the price fails to exceed the level of the point of extremum, the trader should keep the short position.