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How to Buy Shares: Calculating Average Directional Movement in Excel

Author:

Ngureco has trained in Mathematics and Natural Sciences. She is a researcher with a passion for gardening.

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.

  1. 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.
  2. Insert the stock’s high, low, and closing prices in each of columns “B”, “C” and “D” respectively.
  3. Compute Up-Move by inserting “= (B1-B2)” in column “E”.
  4. Compute Down-Move by inserting “= (C1-C2)” in column “F”.
  5. Check if Up-Move is greater than Down-Move by inserting in column “G” the formula “=if(abs(E1)>abs(F1),1,-1)”
  6. Check if Up-Move is greater than 0 by inserting in column “H” the formula “=if(E1>0,1,-1)”
  7. Check if Down-Move is greater than 0 by inserting in column “I” the formula “=if(F1>0,-1,0)”
  8. Compute +DM by inserting in column “J” the formula “= if(G1+H1=2,E1,0)”
  9. Compute -DM by inserting in column “K” the formula “= if((G1+I1)=-2,F1,0)”

True Range

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”

Directional Indicators

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.

Trades:

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.

ADX has become a widely-used indicator by traders through out the world

ADX has become a widely-used indicator by traders through out the world

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

Comments

ngureco (author) on September 13, 2012:

Arun,

The most recent data is at the top of the column.

Arun V on September 13, 2012:

Are you formulas based on the most decent data being at the top?

monicamelendez from Salt Lake City on August 01, 2012:

I've been looking through a few of your hubs and I am super impressed. I'm learning a ton by reading your stuff. I've been trying to get really good at Excel for a while now.

MUKESH on May 08, 2011:

THANKS A LOT,

PLEASE SAVE EXCEL SHEET ALSO FOR DOLWLOADING

chamilj from Sri Lanka on April 24, 2011:

Very useful article for stock traders. Thanks!

kjetil on November 29, 2010:

I love trading patterns so I really enjoyed this hub.

Thanks ngureco!

david bhatti on September 06, 2010:

my first reaction-the above tutorial provided an introduction to understanding ADM. Understanding what charts on a broker's site aim to do has been a problem. I believe this tutorial and perhaps other like this will meet that requirement. Many thanks.

harsh435 on July 31, 2010:

I m searching Excelsheet for W.D. Gann Tracement in the same pettern.Can anybady provide.

Rismayanti from Tropical Island on June 05, 2010:

informative

commoditytrader on March 18, 2010:

Great Post! Thanks for the tips.

vasu on March 12, 2010:

excellent

Securityace from United States on February 03, 2010:

What a great explaination on how to trade using the ADX. I will give the spead sheet a try.

docrehab from MIAMI, FL on December 24, 2009:

Nice!

HASAN on December 12, 2009:

SOME ONE HAS TO UNDERSTAND MATHS VERY WELL!

sam on December 11, 2009:

nice hub

xunlei on December 10, 2009:

it is a nice hub , Thanks ?

Heavensgates on December 05, 2009:

Ngureco, I'll get this one day! Thanks for the helpful hub, even if I haven't grasped it all yet.

subirkrdatta on December 05, 2009:

A nice piece of information.

giimasterone on December 01, 2009:

thank you it is useful.

Douglas45 from Winston-Salem, NC on October 30, 2009:

Great site. Thanks for the info.

vinner from India on October 20, 2009:

thanks for this wonderful piece of information

Jyoti Kothari from Jaipur on September 30, 2009:

very god descption with mathematical calculations.

You may also like to visit some of mine about stock market.

Thanks

Jyoti Kothari

Priscilla Chan from Normal, Illinois on September 29, 2009:

It is so complicated to learn but it is good information. Thanks for sharing.

ediddy5 on September 28, 2009:

Very nice to know.

articleposter on September 28, 2009:

Thanks for your time, always good read

mfresh7 from India on September 28, 2009:

This is cool. Can you give a downloadable example of the Excel sheet that you are building in this tutorial?

ForexCashBack from Corvallis, Oregon on September 28, 2009:

I created an automated trading system that was based on the ADX. Orders are placed when the +Di and -Di line reach a certain difference in value, and the position is placed according to what line is on top. J Welles Wilder also recommended in his book that the PSAR be used with the ADX to determine when to exit the market. I experimented with a 28 day period, mixed results.

StevenCavendish on September 27, 2009:

This is definitely a cut above the usual stock hubs. Thanks very much ngureco.

sudamaprasad on September 26, 2009:

good idea

hybridway on September 23, 2009:

Great insight into penny stock. Info will assist novice interested in jumping into stock market investing. Thanks.

emdi on September 22, 2009:

Thanks for the nice hub.

Mitch King from Wilsoville, OR, USA on September 21, 2009:

Wow, very technical hub. For those looking to take over their own investments understanding these formulas is essential.