Average Directional Movement Index Rating (ADXR)
The Average Directional Movement Index Rating (ADXR) measures the strength of the Average Directional Movement Index (ADX). It's calculated by taking the average of the current ADX and the ADX from one time period before (time periods can vary, but the most typical period used is 14 days).
Like the ADX, the ADXR ranges from values of 0 to 100 and reflects strengthening and weakening trends. However, because it represents an average of ADX, values don't fluctuate as dramatically and some analysts believe the indicator helps better display trends in volatile markets.
This smoothing step results in the ADXR being slightly less responsive than the ADX. Where the ADXR shines is its ability to compensate for the variance of excessive tops and bottoms.
It is especially helpful when used in conjunction with trend-following strategies. Strategies that rely on volatility as an indication of movement often fail to take into account that movement does not necessarily indicate volatility. ADXR provides information pertaining to the strength of a trend, helping to manage the risk of trading in volatile markets that fluctuate between trending and non-trending. The interpretation of ADXR is the same as that for ADX: the higher the value, the stronger the trend.
The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.