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Trading Technique with ADX

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This is a very simple trading strategy which is based in only two indicators, a simple moving average and the ADX which can be found in virtually all trading platforms like Metatrader 4. Also, the trading rules of this strategy are quite simple and include a filter for the signals generated. This strategy can be used with any time frame but the author recommends its use with time frames of 1 hour and 4 hours.

Trading system description

As the name suggest, this is a trading system based on the technical indicator ADX and its rules are very simple. However, it requires a filter because under certain market conditions as it produces many false signals, especially in markets without a clear trend as this is a strategy based on trends.

Trading Instruments

This trading strategy can be used to trade with any instrument making the appropriate changes for each market.However, initially it was developed for the Forex market.

Indicators

  • A candlestick/bar chart of 1 hour or 4 hours.
  • ADX of 14 periods.
  • A simple moving average of 21 periods.

Trading system rules

-Buy Signal

  • Once the +DI line crosses the -DI line in the ADX, open a long position in the first candle that opens above the line of the simple moving average of 21 periods.

-Sell Signal

  • Once the -DI  line crosses the +DI line in the ADX, open a short position in the first candle that opens below the line of the simple moving average of 21 periods.

Additional Notes

As we mentioned previously, this trading technique may require the use of a filter to ensure the reliability of the signals. A filter that can be used could be the following:

  • A combination of the following moving averages: EMA of 100 periods, EMA of 200 periods and SMA of 13 periods.
  • In this way, when the moving averages of 100, 21 and 13 periods are above the moving average of 200 periods, this is a clear signals that the market is in a clear uptrend, but if the same moving averages are bellow the moving average of 200 periods, this means that the market is in a downtrend. Under these conditions the system signals are more reliable.
  • Likewise, when the moving averages are mixed together without a clear direction and crossing each other at every moment the market is probably in a sideways trend. In this case we should not enter the market.
  • Another filter that we can use is based on the same ADX. When lines + DI and -DI are below the level of 20 or above level 40, this is an indicative that the trend is losing strength or has already lost it.

Example of trading signal generated by this system

Example of trade with trading systema based on ADX

In this example we can see a clear buy signal when the +DI crosses the -DI and the price crosses the SMA 21 from below to above. Because the lines +DI and -DI are below the level 20 of the ADX, the downtrend shows signs of losing momentum which reinforces the reliability of the signal. After opening the position, the market moved upward with a strong momentum.

Example of filter for this trading system

Example of trading system filter

In this example we apply the filter to the signal of the previous operation. In this case all moving average are well separated and therefore the market is in a clear trend. Although the price is below the EMA 200 and the EMA 100, the crossing of the EMA 13 over the SMA 21 indicates a possible temporary trend reversal from bearish to bullish.

 

 

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