ADX Trading Strategies are backtested for your informational purposes.

The Average Directional Movement Index (‘ADX’ for short) is popular because it shows when the trend is strong and weak.  It also is a multi-faceted Oscillator that provides opportunities to use it in a few different ways.  It is an indicator that is useful as a filter or on its own.  In this article, we explore the ADX Indicator and various ADX Trading Strategies so that you can make it a part of your one of your trading strategies (we’ll help you make the portfolio).

What is the Average Directional Movement Index (ADX)?

Beyond being one of the standard indicators you get in any trading platform package it is a great filter for understanding trends so that if your algorithm is to trade breakouts, reversals, continuations or retracements, you can be able to accomplish it.  It is a neat tool that may be strangely misused and it will be a part of the testing procedure to see if ADX Trading Strategies that use the default settings fare better than custom settings.  There are a number of ADX Trading approaches including the ADX crossovers, but first what is in it?

The Average Directional Movement Index is the Blue Line.   It indicates the strength of a trend.  Commonly, a strong trend is associated with an ADX of 40 or greater.  There are points much higher that indicate that a trend is ready to fade.

The Red Line is the DI-, which is the negative directional indicator.

The Lime Line is the DI+, which is the positive directional indicator.

When the DI- crosses over the DI+, this is an indication that the trend is headed bearish.  When the DI+ crosses over the DI-, this is an indication that the trend is headed bullish.

This is an indicator that will fall between 0 and 100.  Higher numbers mean stronger trends (ADX) or directional proclivities in the case of the DI- and DI+.

How can ADX be used?

• Divergence
• Convergence
• Filtering
• Trend Strength
• Crossovers

You have options as to how you wish to implement it.

ADX Trading Strategies Tested

The procedure will be much like the Ichimoku Trading Backtests, different strategies will be tested according to the rules set out by the creators of the strategy over the course of course of June 1, 2016 through May 31, 2018.  The following currency pairs will be used:  EURUSD, USDJPY, AUDUSD.

• ADX Scalping FOREX Strategy  

• Forex Strategy With ADX And Fast EMA Cross System

• ADX Power

ADX Scalping FOREX Strategy

Indicators used:  ADX (Average Directional Movement Index) 50 Period, RSI (Relative Strength Index) 2 Period.

Timeframe:  15 minute chart.

Sell Entry:

• Red Line is higher than Green Line.
• Blue Line is greater than 15 and rising.
• RSI rises above 70.
• Previous candle must be bearish.

Sell Exit:

• Stop Loss:  Above the high of the previous bearish candle.
• Take Profit:  Red Line crosses below Green Line.

The stop loss is vague, but this will require some interpretation in terms of the actual code.  The stop loss for a long Entry is along the same levels of vagueness.

Buy Entry:

• Green Line is higher than Red Line.
• Blue Line is greater than 15 and rising.
• RSI falls below 30.
• Previous candle must be bullish.

Buy Exit:

• Stop Loss:  Below the low of the previous bullish candle.
• Take Profit:  Green Line crosses below Red Line.

EURUSD 

USDJPY

AUDUSD

There were only three trades.

Forex Strategy With ADX And Fast EMA Cross System

Indicators used: 200 period EMA, 12 period ADX, EMA 5 Period (on the Close) and 6 Period (on the Open).

Timeframe:  1 Hour Chart

Buy Entry:

• Price is above 200 EMA
• Green Line above Red Line
• EMA 5 above EMA 6 (this is the entry)
• Enter on next candle

Buy Exit:

• Stop Loss:  10 pips below the candle that is before the previous candle.
• Take Profit:  Pips amount that is double the Stop Loss.

Sell Entry:

• Price is below 200 EMA
• Red Line above Green Line
• EMA 5 below EMA 6 (this is the entry)
• Enter on next candle

Sell Exit:

• Stop Loss:  10 pips above the candle that is before the previous candle.
• Take Profit:  Pips amount that is double the Stop Loss.

What went wrong here with this strategy was that the Stop Losses ended up being less than 3 pips from the entry price or were above the entry price rendering the Stop Losses invalid and the trades encountered problems.  Instead, a flat 100 pips Take Profit/50 pips Stop Loss was imposed (and hard-coded, which is a generally bad thing to do when coding).  This is what happens when testing systems from articles on the Internet.

USDJPY

AUDUSD

ADX Power

Indicators used: EMA 9 and 26 period, ADX 14 Period.

Timeframe:  4 Hour Chart

Buy Entry:

• ADX (Blue Line) is in between the Green and Red Lines.
• Green Line is above 25.
• ADX is above 20.
• EMA 9 crosses above EMA 26.

Buy Exit:

• EMA 9 crosses below EMA 26 and Red Line is higher than Green Line.

Sell Entry:

• ADX (Blue Line) is in between the Green and Red Lines.
• Red Line is above 25.
• ADX is above 20.
• EMA 9 crosses below EMA 26.

Sell Exit:

• EMA 9 crosses above EMA 26 and Green Line is higher than Red Line.

EURUSD

USDJPY

AUDUSD

Impressions after ADX Trading Strategy Testing

These published trading strategies were not that good.  ADX can be used better, but that is up to traders to experiment and figure out in backtests to see what the best market environments are for this indicator.  Before jumping in and trying to manually trade these strategies, code them and see if they would actually work and automate the trades if it passes muster.

None of these strategies did, which is a shame.  However, now you know.

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