How to Buy Shares: Calculating Average Directional Movement in Excel
Average Directional Movement Indicator
If you plan to enter the business of trading shares or stocks for a living, then you are likely to come across Average Directional Movement (ADX). ADX has become a widely-used indicator by traders throughout the world. The Average Directional Index, ADX, was created in 1978 by J. Welles Wilder for determining the strength of a trend.
We start by defining an exponential moving average as a moving average with weighing factors which decreases exponentially, giving much more importance to recent prices while still not discarding older prices entirely. The exponential moving average is also called an exponentially weighted moving average.
Calculating Average Directional Movement Using Excel
Here are the steps you need to take to compute Welles Wilder’s Average Directional Movement (ADX) using Excel.
- If you decide to use a 14-day period, then insert the numbers 1 to 14 in column “A”. You need the sum total of the fourteen numbers which you will get by using the formula “=Sum(A1:A14)” which is equal to 105.
- Insert the stock’s high, low, and closing prices in each of columns “B”, “C” and “D” respectively.
- Compute Up-Move by inserting “= (B1-B2)” in column “E”.
- Compute Down-Move by inserting “= (C1-C2)” in column “F”.
- Check if Up-Move is greater than Down-Move by inserting in column “G” the formula “=if(abs(E1)>abs(F1),1,-1)”
- Check if Up-Move is greater than 0 by inserting in column “H” the formula “=if(E1>0,1,-1)”
- Check if Down-Move is greater than 0 by inserting in column “I” the formula “=if(F1>0,-1,0)”
- Compute +DM by inserting in column “J” the formula “= if(G1+H1=2,E1,0)”
- Compute -DM by inserting in column “K” the formula “= if((G1+I1)=-2,F1,0)”
Define “True-Range” as the largest of:
(a) Today's High - Today's Low
(b) Today's High - Yesterday's Close
(c) Yesterday's Close - Today's Low
10. Compute absolute (Today's High - Today's Low) by inserting in column “L” the formula “=abs(B1-C1)”
11. Compute absolute (Today's High - Yesterday's Close) by inserting in column “M” the formula “=abs(B1-D2)”
12. Compute absolute (Yesterday's Close - Today's Low) by inserting in column “N” the formula “=abs(D2-C1)”
13. Compute True-Range (TR) by inserting in column “O” the formula “=Max(L1:N1)”
Exponential Moving Average
Next, compute the following:
14. Exponential moving average (+DM14) of +DM by inserting in column “P” the formula “=((14*J1+13*J2+12*J3+11*J4+10*J5+9*J6+8*J7+7*J8+6*J9+5*J10+4*J11+3*J12+2*J13+1*J14))/105”
15. Exponential moving average (-DM14) of -DM by inserting in column “Q” the formula “=((14*K1+13*K2+12*K3+11*K4+10*K5+9*K6+8*K7+7*K8+6*K9+5*K10+4*K11+3*K12+2*K13+1*K14))/105”
16. Exponential moving average (TR14) of TR by inserting in column “R” the formula “=((14*O1+13*O2+12*O3+11*O4+10*O5+9*O6+8*O7+7*O8+6*O9+5*O10+4*O11+3*O12+2*O13+1*O14))/105”
Next, calculate the Directional Indicators as follows:
17. Directional Indicator (+DI14) = +DM14 divided by TR14 by inserting in column “S” the formula “=P1/R1”
18. Directional Indicator (-DI14) = -DM14 divided by TR14 by inserting in column “T” the formula “=Q1/R1”
Next, calculate the components of the Average Directional Movement Index (ADX)
19. Calculate the absolute DI Difference (+DI14 - -DI14) by inserting in column “U” the formula “=abs(S1-T1)”
20. Calculate DX = DI Difference divided by the sum of +DI14 and -DI14 by inserting in column “V” the formula “=U1/(sum(S1: T1))”
21. Calculate ADX = the exponential moving average of DX by inserting in column “W” the formula “=((14*V1+13*V2+12*V3+11*V4+10*V5+9*V6+8*V7+7*V8+6*V9+5*V10+4*V11+3*V12+2*V13+1*V14))/105”
Draw or Insert a Chart Using Excel
Hold and drag your formulas from columns “E” to column “W” downward in as much as you would want to go into the past.
Now select columns “S”, ”T” and “W” data and draw or insert a chart using Excel. You will now have The Directional Movement System as developed by Welles Wilder and as shown in the image below which you can use for entering and exiting your trades. Once you learn how to use Directional Movement System in excel then you can later manipulate it to your liking and the sky will be the limit to what you can do with it.
Buy shares or go long the stocks when +DI is above -DI and at least one of the following has happened:
1. ADX rises while +DI and ADX are above -DI
2. ADX turns up from below +DI and –DI
Close or exit your positions when +DI crosses below -DI
Short stocks or trade in downside direction when -DI is above +DI and at least one of the following have happened:
1. ADX rises while -DI and ADX are above +DI
2. ADX turns up from below +DI and –DI
Close or exit your positions when -DI crosses below +DI
Important: Always use automatic stop-loss orders which should preferably be with your stockbroker. Average Directional Movement, ADX, does not indicate trend direction. ADX indicates only the trend strength. ADX is a lagging indicator and traders must be aware of this. It is only after a trend has established that ADX will generate a signal. Average Directional Movement, ADX, will range between 0 and 1. Values below 0.20 indicate a weak trend and values above 0.40 indicates a strong trend.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2009 ngureco