Forex adx trading system

Learn Forex: The ADX Indicator Is a Power Tool for Trading Trends.

Position Trading based on technical set ups, Risk Management & Trader Psychology.

Entering into a fading or weakening trend is one of the most frustrating things a trader can encounter. Many traders have strategies for trend entry but if a trend has run its course and is weakening then it is of no use to you regardless of the entry set-ups.

Combining the Average Directional Index or ADX with a Trend Entry strategy can help you trade breakouts and pullbacks with higher probability.

The ADX is used to qualify and quantify trend strength. The approach and display is very simple. The ADX filter can have very beneficial effects on your trading results.

The indicator measures only strength but not directional bias. This allows the trader to choose the strongest trends to enter and let profits run when the trend is strong as per the ADX.

The GBPJPY shows an uptrend on the chart with multiple entries as the ADX indicator on the bottom shows a majority of readings above the strong trend level. The red line was added as a reference point of when the indicator shows a strong trend.

To filter the trend strength, we recommend looking for trend entries only when the ADX is above 25.

ADX Rule: When trading trends, the ADX rises when the trend is strong. When the trend is weak, ADX drops. This table will guide you through translating ADX values to trend strength.

ADX is not a directional indicator, only a Trend Strength identifier. Much like the RPM on a car doesn’t tell you the speed, only the force. ADX is the same behind the trend.

For directional bias, we recommend combining indicators to find pullbacks in the direction of the overall trend or breakouts with the ADX. This will combine higher probability set ups with a strengthening trend.

Entering Strong Trends.

Rule one for a lot of traders is that you can control the risk but not the market. Another rule is to only enter the higher probability set ups that match your trading profile. Using the ADX allows you to filter a current potential trade to see if the entry is worth the risk.

ADX is the filter we will use to determine whether a down move is worth entering on a sell trade. ADX will also be used in the same manner to grasp if an up move is worth entering on a buy trade. Either way the ADX will break through 25 to tell us that a strong trend is in play.

This current USDCAD set up shows us the beginnings of another potential strong down move.

Here are the tools at use on the chart above:

-ADX for filtering Trend Strength.

-Fibonacci Retracement for support in a downtrend.

-Stochastic for price turning back down from overbought levels.

First and foremost, we will keep our eye on the ADX to push through 25. When the ADX breaks through 25, we have the indicator’s invitation to enter in the direction of the overall trend. The USDCAD overall trend on the daily chart is downward.

Because the ADX isn’t there yet, we’ll wait for the set up to develop.

Fibonacci retracements are a popular tool to identify potential levels with horizontal lines to indicate counter move exhaustion. In other words, support in a downtrend is potentially at one of these levels and when price bounces off these levels we can look to enter off that resistance point in a downtrend.

A favorite of many traders is the 50% level of any move. This 50% principle states that if a move, after all its variations in price, can hold the halfway level, there’s a good chance the overall trend will prevail. If the market cannot hold 50% of its move, then it may break down and reverse the overall trend.

We can see above that the market held the 50% level and is looking to move back down. If the ADX breaks through we have another confirmation.

The last indicator we will use is the slow stochastic oscillator (SSD). This momentum indicator compares a currencies closing price to its price range over a given time period in a range of 0-100. The 80 level shows an overbought reading and the 20 level shows an oversold reading. You can adjust the time period of the indicator to reduce the stochastic’s sensitivity to market movements.

During a downtrend, prices tend to close near their lows. Slow stochastic signals occur in a downtrend when the indicator turns down below 80 after a temporary upswing in the market. This shows higher probability entries.

These two indicators were added to the ADX to show you the flexibility allowed to the trader with this indicator. In the end, the ADX quantifies trend strength so you know if this is a trade worth entering based on your money management rules.

The ADX allows you to combine the indicators you are already comfortable with to ensure you’re only trading the strongest trends. This can keep you out of choppy markets when your objective is letting your profits run on a trend.

---Written by Tyler Yell, Trading Instructor.

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Metatrader ADX Indicator Settings – A Simple ADX Trading System.

This is the third article in our ADX series. If you haven’t already, we suggest that you check out the first article about the ADX Indicator. In the previous two articles, we have covered the history, the calculations involved, and how to use and read the ADX indicator. The ADX indicator will typically have three lines, one each for measuring descending and ascending trends (referred to as “DM” or Directional Movement lines), and then the “signal” line that represents the “absolute” force of either the ascending or the descending trend.

Forex traders use technical analysis to determine optimal entry and exit points in the market. They focus on the ADX key points of reference, which are highpoints and line crossovers. As with any technical indicator, an ADX chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding ADX signals is developed over time. In the example below, let’s develop a simple trading system based on ADX signals and alerts.

The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “yellow” circles on the above chart illustrate optimal entry and exit points that can be discerned from using ADX analysis.

A simple trading system would then be:

Determine your entry point when the “green” line crosses the “gold” line in an upward movement, accompanied by the ADX “signal” line moving in a similar direction as the “green” line; Execute a “Buy” order for no more than 2% to 3% of your account; Place a stop-loss order at 20 “pips” below your entry point; Determine your exit point when an upwardly moving “signal” line peaks at a value above the 40 mark, accompanied by a rising “gold” line.

Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded two separate 100 “pip” gains, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, ADX Technical Analysis will provide you with an “edge”.

That concludes our series on the ADX Indicator. For further reading visit our Forex indicators section.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

Forex trading strategy #2 (Parabolic SAR + ADX)

Submitted by Edward Revy on February 28, 2007 - 15:01.

The two indicators we are going to talk about here are found to be very well working when used side by side. This Forex trading system is an another simple discovery; and hundreds of such discoveries can be made when traders are there to learn and experiment.

Any currency pair and time frame can be used.

Indicators: Parabolic SAR default settings (0.02, 0.2), ADX 50 (with +DI, - DI lines)

Entry rules: SELL When the +DI line is below the - DI line, and Parabolic SAR gives sell signal. When the +DI line is above the - DI line, all Parabolic sell signals must be ignored.

Entry rules: BUY when the +DI line is above the - DI line, and Parabolic SAR gives buy signal. When the +DI line is below the - DI line, all Parabolic buy signals must be ignored.

Exit rules: when +DI line and - DI lines have crossed again.

Advantages: allows filtering entries and predicting good exits.

Disadvantages: Both Parabolic SAR and ADX are follow-up indicators. Although they complement each other very effectively, the “weakest” in chain is ADX, because during trading it can give one signal, but later change to the opposite. Once given a signal from ADX, waiting for the current price bar to close to avoid such misleading is advised.

This strategy is very powerful, i use this beside that i add ema21, run chart on h4 and daily, entry decision on h1, margin used 1%

Thanks for this very good site, very helpfull.

Ezra, can you tell my how you used your ema21 ? To know trend direction ?

I'll try to comment it.

EMA 21 first of all provides a good visual aid, showing trend direction. Also it acts as a confirmation line: if we are ready to sell, the price should trade below 21 EMA, and vise versa, when we got a signal to Buy the price should trade above 21 EMA. Once confirmed, we happily press an execution button.

thank you..much appreciated.

Could someone please teach me how to set +DI and - DI? Many thanks in advance.

On some trading platforms - DI and +DI come with ADX indicator.

On others look for DMI (Directional Movement Index) indicator.

edward - you are such a nice and a genuine person.

thanks for sharing all the strategies.

DOES IT MEAN THAT YOU CHECK 21ema ON BOTH 4 HOUR AND DAILY CHART BEFORE TRADING OR ON ANY ONE OF THEM.

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Forex trading strategy #14 (ADX Power)

Submitted by User on June 10, 2009 - 12:46.

Just another simple to follow strategy for you guys, hope you find it useful.

- Timeframe: I use it on 4 hours, feel free to use it on smaller timeframes as well.

- Currency Pair: Any.

- Indicators: EMA9 and EMA26 and DMI (Directional Movement Indicator with ADX)

- DMI Settings: Draw a horizental line at 25 to watch for the crossovers of DI+ or DI-

- ADX Settings: Ignore signals where ADX is lower 20.

- EMA9 has crossed over EMA26.

- ADX is in between DI+ and DI-

- EMA26 has crossed EMA9 AND.

- DI - is higher than DI+

- EMA26 has crossed EMA9.

- ADX is in between DI - and DI+

EXIT SHORT WHEN:

- EMA9 has crossed EMA26 AND.

- DI+ is higher than DI-

- While in Long Position: DI+ and DI - Cross-overs while the EMA9 is still on top of EMA26.

- While in Short Position: DI+ and DI - Cross-overs while the EMA26 is still on top of EMA9.

- While searching for Trading Opportunities: The EMAs has crossed over but the DI+ or DI - (depending on whether you're looking for Long or Short positions) are still under 25. Also, wait till the ADX has reached 20 before entering into Trade.

- Price breaking the Lower EMA (EMA26 in case of Long Positions) line while the EMA9 is still on top of EMA26.

Good luck and happy trading,

What stops do you use? Exactly where do you enter - do you switch to smaller time frames, wait for the 4 hour bar to close, or enter as the last condition is met within the current 4 hour bar?

SL really depends on your personal money management technique, I normally take it as a certain % of my overall portfolio size.

In terms of Entry point, if you look at the screenshots, its exactly at the Open of Next Bar when the DI+ has crossed 25 and ADX is > 20 (of course the EMA9 should already have crossed EMA26). In screenshot you might see a couple of Arrows pointing UP or DOWN, these are my entry and exit points in these particular examples.

Great simple strategy, very well thought out! In your opinion how important is it to have the ADX line between DI+ and DI - to enter a trade? Do you have any exceptions to that rule or do you follow it strictly and pass on any trade where the ADX is not between the + or - lines?

Thank you very much for presenting this to us, Phil.

Very good question :) I was expecting this to come up, here is what I've found for you in one of the help files explaining how to make the best use of ADX and DI lines:

Uses of the DI and ADX Lines.

DMI can be used either as a trading system on its own, or as a filter for another trend-following indicator (i. e., Parabolic SAR, MACD, CCI or Moving Averages).

In both cases the following general principles apply:

An ADX line rising above 20 or 25 indicates that a trend may be forming that will be a good candidate for a trend following indicator (see filters, below)

+DI crossing over – DI is a signal for going long.

–DI crossing over +DI is a signal for going short.

ADX line falling below 40 is an early indication of a change in trend.

The ADX line should be between the DI lines when the market is trending.

An ADX line below 20 is a warning not to trade.

As you can see there are a couple of important points highlighted. First that the ADX should be in between DI lines and the other thing to watch is if the ADX has risen above 40 (and now heading south) as it might be a time for Trend Reversal (however sometimes I've even seen it rising to 60 depending on the strength of trend, I normally keep myself in trade until either the ADX has fallen below 40 or EMAs are crossing each other).

The other thing I forgot to mention while submiting the strategy is that you should also watch for the movement of ADX and ovoid the signals (for example DI+ crossing over DI-) while the ADX is already exhausted and tired and has been above 20 since a long time. Ideally you're looking for a new Trend Build-up which means ADX is rising from below 20 while the DI lines have crossed over (however sometimes you might have to allow exceptions to this rule).

Hope that helps .

I am just curious - how did you figure out such unusual numbers as EMA9 and EMA26? Why not 10 and 20 or anything else?

Does this techinque need you to be constantly in front of your computer. How do you suggest me we catch the trend.

I hope that you've found the strategy useful, please don’t forget to post your feedback if you ever apply this strategy on any of the Currency Pair (of course the DEMO account first).

In terms of 9/26 combination, there are multiple reasons for me to choose these in EMA, such as:

I actually used different combinations for this strategy and ended up picking up 9/26 because the smaller combination (such as 5/20) will give you a quick Entry but a very quick Exit as well. While the larger combination such as (20/50) can give you a very solid Entry but sometimes quite a late Exit.

In terms of sitting in front of your monitor, NO I dont do that and that is why I prefer using larger timeframes such as 4H. Also, my CFD broker allows me to setup Alerts based on different conditions. Once I've entered into a trade, I would setup an alert for the EMA Crossover in opposite direction.

I'm gussing that by catching Trades, you're looking for a Scanner software perhaps.

To find opportunities for trading, I'm not aware of a Scanner program for Forex, however I've previously used stockfetcher for Stocks Scans. My current CFD Broker has a built-in feature of Real-time Scanning which also works on Forex and other Instruments on any timeframe.

For Scanning, I'm basically looking for Pairs where ADX is anywhere between 15 and 19 and is on the rise .

Good luck once again.

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