Strength indicator: ADX

Financial Trading in Python

Chelsea Yang

Data Science Instructor

What is ADX?

Stands for "Average Directional Movement Index"
Developed by J. Welles Wilder
- "New Concepts in Technical Systems" (1987)

Wells Wilder book

Measures the strength of a trend
- Oscillates between 0 and 100
- ADX <= 25: no trend
- ADX > 25: trending market
- ADX > 50: strong trending market

How is ADX calculated?

Derived from the smoothed averages of the difference between +DI and -DI
- +DI (Plus Directional Index): quantify the presence of an uptrend
- -DI (Minus Directional Index): quantify the presence of a downtrend

Calculation input:
- high, low, and close prices of each period

Implementing ADX in Python

# Calculate ADX
stock_data['ADX'] = talib.ADX(stock_data['High'], stock_data['Low'], stock_data['Close'],
                              timeperiod=14)

# Print the last five rows
print(stock_data.tail())

             Open   High    Low  Close   ADX
Date                                        
2020-11-24 540.40 559.99 526.20 555.38 21.16
2020-11-25 550.06 574.00 545.37 574.00 23.92
2020-11-27 581.16 598.78 578.45 585.76 26.82
2020-11-30 602.21 607.80 554.51 567.60 28.25
2020-12-01 597.59 597.85 572.05 584.76 29.58

Plotting ADX

import matplotlib.pyplot as plt

# Create subplots
fig, (ax1, ax2) = plt.subplots(2)


# Plot ADX with the price
ax1.set_ylabel('Price')
ax1.plot(stock_data['Close'])
ax2.set_ylabel('ADX')
ax2.plot(stock_data['ADX'])

ax1.set_title('Price and ADX')
plt.show()

A price plot on the top and an ADX plot on the bottom

Let's practice!

Financial Trading in Python