The «Direction» Universal Trading Strategy
The ADX is considered a unique indicator. Its addition to the range of Binomo tools has significantly expanded opportunities for traders. If, for example, the RSI differs little from the Stochastic in practice, then the ADX is a fundamentally different indicator. In this article, we will consider a trading strategy which is based on two indicators – the average directional movement index and the exponential moving average.
Overview of the indicators
The ADX is part of the DMI system, which has gained quite a bit of popularity. We’re not going to dive deep into theory, we’ll go right to practice. To use this tool, you need to understand its structure. The average directional movement index consists of three lines – red, green, and white.
- Red (-DI) – this is the index of negative price movement. The higher the curve is, the stronger the downward price trend.
- Green (+DI) – this is the index of positive price movement. This line shows the strength of an upward price trend.
- White (ADX) – this curve shows the total strength of the current trend. Its direction does not matter.
A key point is the intersection point of +DI and -DI. This means that one of the forces on the market has taken over. The potential of the ADX is high, since the distance between the curves and their position relative to the white line is also important. A specific numerical value of the index level also plays a role. But we will not touch upon such subtle points in this strategy.
Exponential Moving Average – this indicator is in second place in popularity after the Simple Moving Average. The only difference is the modified averaging formula. For ordinary traders, the mathematical details do not play a role. Therefore, we note in the conclusion of this review that this indicator is characterized by a reduced delay without the accuracy of the signals being lowered.
Setting up the trading platform
To begin with, we note that this strategy, like the vast majority of others from our site, is universal. Therefore, the trading asset used does not play a fundamental role. Volatile currencies or cryptocurrencies are suitable for our purposes. So, we’ll need to add two indicators.
- The ADX. The main period and smoothing factor is 30.
- The Moving Average. Period – 50, type – Exponential, color – any contrasting color, for example, yellow.
Indicator technical analysis should be conducted on a candlestick chart. As for the time frame, this is an ambiguous question. The strategy is scalable. The main criterion is observance of the ratio relative to the time interval of the chart and the duration of the transaction. It should be selected in such a way that the expiration is equal to 3-6 candles on the chart. The optimal ratio: period – 15 seconds, expiration – 1 minute, minimal.
Trading signals on the strategy
The principle of the trading system is simple. It’s the ADX with an increased averaging period and the control Moving Average, which enables you to determine the state of the market. Using the EMA makes it possible to filter out a large number of false positives from the indicator. At the same time, it compensates for ADX lag due to the period of 30.
- The signal for an increase is an increase of +DI and a decrease of -DI to the point of their intersection, and growth of the white ADX line, combined with an EMA breakdown downwards.
- The signal for a decrease is a decrease of +DI and an increase of -DI up to their intersection, ADX growth, and a red candle breaking through the EMA upwards.
An important point is the state of the ADX during the last 10-15 price bars before the signal is generated. If the distance between the green and the red line is minimal, they often intersect and build in practically the same plane, so it is better to refrain from trading on the signal. This is a sign of low volatility.
Example of trading on the strategy
The key factor of a trader’s success is the ability to recognize subtle signals which together form an integral picture. The ADX quite often shows intersections of lines. Therefore, the sign of a true signal is the formation of a second candle after the breakdown of the Moving Average which continues the direction of the first one’s movement.
There was an intersection of the curves +DI and -DI with the exit of the latter above the remaining lines. The signal is confirmed by the formation of a second candle below the EMA. Therefore, we open the trade on a decrease.
The trade closes with a profit. As a result of the signal, we managed to capture the final momentum of price movement before a downtrend reversal. The picture was taken in the first split second after the closing of the transaction, so the chart shows the moment of entry and exit from the market.
If you’ve also studied other strategies from our site, you should be aware of the general trading rules. First, there is a 5% limit on the amount of maximum investment in a transaction. Secondly, there is a standard ban on trading during a market flat.