Average Directional Movement (ADM)

The Average Directional Movement system, developed by J. Welles Wilder Jr., is a comprehensive framework for measuring both the direction and strength of market trends. The system consists of three components working together: the Positive Directional Indicator (+DI), the Negative Directional Indicator (-DI), and the Average Directional Index (ADX). The +DI measures upward directional movement by comparing consecutive highs — when today's high exceeds yesterday's high by more than yesterday's low exceeds today's low, the difference is recorded as positive directional movement. The -DI measures downward directional movement using the inverse logic with consecutive lows. Both are then smoothed (typically over 14 periods) and expressed as percentages relative to the Average True Range, normalizing them for volatility. The ADX is calculated from the smoothed ratio of the absolute difference between +DI and -DI to their sum, providing an overall trend strength reading. Trading signals from the system include: directional crossovers (+DI crossing above -DI for bullish signals, -DI crossing above +DI for bearish signals), ADX rising above 20-25 confirming a tradeable trend, and ADX declining from high levels signaling trend exhaustion. Wilder recommended the "extreme point rule" — after a crossover, noting the extreme price of that day and only entering the trade if price subsequently exceeds that level, as a confirmation filter.