J welles wilder software#
I have pointed out this problem to various charting services over the years and most of them have understood and modified their formulas.įortunately most software providers now carry their calculations out to the required two or three decimal places and there are many places on the web where ADX can be obtained for free. To use the ADX correctly we must carry the calculations out to at least two decimal places. For example a significant upward move from 25.05 to 25.35 leaves the rounded ADX unchanged at 25 while an insignificant move from 25.45 to 25.55 jumps the ADX a whole point from 25 to 26.
Rounding causes serious problems when trying to measure the critical rate of change. Unfortunately, a few of the popular software providers follow Wilder’s original instructions which called for rounding the ADX to the nearest whole number. In fact I have observed that many of the strongest and longest lasting trends will start with a rise in the ADX of 1.00 or more from bar to bar. If the change from the previous bar is greater, say 0.50 or more, then that higher rate of change indicates that an even stronger trend is in place. In my experience with ADX using Wilder’s default period of 14 bars I have found that any upward movement from the previous bar of 0.25 or greater is significant and tells us that a trend is underway. An ADX that is rising rapidly is more predictive of trendiness than an ADX that is rising slowly. Once this vital distinction between the level of the ADX and the direction of ADX is understood we can carry this directional logic an important step further. Traders and technicians need to understand that regardless of the absolute level of ADX, if it is sloping upward the market is increasing its trendiness and if the ADX is declining the market is losing trendiness. An ADX of 20 that is rising steeply is much more predictive of trendiness than an ADX of 40 that is flat or declining. However that is not necessarily correct because it is not the level of the ADX but its direction that provides the predictive information we seek. More important than the ADX level is its direction You would probably not hesitate to respond that the higher level of 30 would obviously be more predictive of trendiness than the lower level. If you are acquainted with Wilder’s book, New Concepts in Technical Analysis that first introduced the ADX/DMI and I asked you: “Which is more predictive of a trending market an ADX of 20 or an ADX of 30?” Welles Wilder Jr., got our basic understanding of his ingenious indicator off to a bad start by explaining that the level of the ADX is what we need to be concerned with.
But to do its job most effectively it needs to be interpreted correctly. As most technicians already know, the ADX is an indicator that measures trendiness.