TASC 2024.12 Dynamic ADX Histogram

11월 21일

█ OVERVIEW

This script introduces a new version of the ADX oscillator, designed by Neil Jon Harrington and featured in the "Revisualizing The ADX Oscillator" article from the December 2024 edition of TASC's Traders' Tips.


█ CONCEPTS

The directional movement index (DMI+ and DMI−) and average directional index (ADX) indicators have long been popular with technical analysts. Developed by J. Welles Wilder in the 1970s, these indicators provide information about the direction and strength of price movements across bars. The DMI+ measures positive price movement, the DMI- measures negative price movement, and the ADX gauges the average strength of price trends. Although these indicators can provide helpful insights into price action and momentum, Neil Jon Harrington argues they are often misunderstood or misapplied.

Harrington's indicator, the Dynamic ADX Histogram (DADX), applies directional information to the ADX based on DMI+ and DMI- values to create a single oscillator centered around 0. The indicator displays the oscillator as a histogram with dynamic colors based on ADX movements and user-defined strength thresholds. The author believes this modification of the ADX and DMI data offers a more intuitive visualization of the information provided by Wilder's calculations.

An additional feature of the DADX is the option to use average (smooth) DMI+ and DMI- values in the oscillator's calculation, which reduces noise and choppiness at the cost of added lag.


█ USAGE

The "ADX Length" input determines the number of bars in the DMI and ADX calculation. The "DMI Smoothing Length" input controls the number of bars in the DMI smoothing calculation. Use a value of 1 for non-smoothed DMI data.

The sign of the DADX indicates the direction of price movements based on the difference between the smoothed DMI+ and DMI- values. The absolute value of the oscillator corresponds to the ADX, representing the trend strength.

The "Low Threshold" and "High Threshold" inputs define the ADX thresholds for categorizing trending, non-trending, and exhaustion states. The low threshold specifies the minimum absolute oscillator value required to indicate a trend, and the high threshold marks the absolute value where trend strength is excessive, possibly suggesting an upcoming consolidation or reversal. The indicator colors the histogram based on these thresholds and changes in the ADX, with brighter colors denoting a strengthening trend and darker colors signaling a weakening trend.