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The Best trading rules for the ADX technical indicator
Like the MACD, Relative Strength Index (RSI) and Stochastic, the ADX, Average Directional Movement, is a very popular trading indicator used by stock, FOREX and commodity traders in technical analysis. The ADX is considered to be the best technical indicator by many traders and investors.
It is a momentum indicator, such as the stochastic, that allow traders to determine whether the market is trending or not and to what extent. An ADX value that is lower than 20, indicates that the trend is weak, while a value above 40, signals a strong trend.
The Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) are two other indicators often used with the ADX. They determine the force of the up and down moves.
The +DI is also referred to as PDI and its QuantShare formula is: Plus_Di(period)
The -DI is also referred to as MDI and its QuantShare formula is: Minus_Di(period)
The ADX calculation is performed by taking the exponential moving average of the combination of +DI and -DI indicators. It is sometimes called Directional Movement Indicator or Wilder's Averaged Directional Index after its creator J. Welles Wilder.
This object contains a list of 13 trading rules that show different ways to trade the ADX indicator. All the rules can be optimized; the list already contains some optimizable variables. It generates more than 70 rules after analysis.
- Crossover rules, such as buy when the +DI is higher than -DI and +DI one bar ago is lower or equal to -DI one bar ago.
- Turning point rules
- Rules that can be used in a trend following system
- Rules with a moving average...
For example, there are rules to buy, sell, short or cover based on the trend, on the crossover of two ADX moving averages or on the period of time the ADX stays below a certain threshold.
In several formulas, you can replace the ADX by the ADXR, Directional Movement Rating, and see if this produce better results for you.
Here is how to create an ADX trading system and optimize the different rules included in the "ADX technical indicator" list:
- Select "Analysis" then "Simulator"
- Click on "New" then choose "Create trading system using the formula editor"
- Type the following ADX formula:
c1 = ApplyRule("", "ADX Rules", -1); // Get the number of trading rules
Optimize("a1", 0, c1-1, 1); // Optimize variable that gets ADX trading rules one by one
buy = ApplyRule("", "ADX Rules", a1); // Enter long position if ADX rule number N is true
- Click on "Create Trading System" then type a name for this strategy (example: ADX best indicator)
- In the "Simulator" form, click on "Optimize" to find the best trading indicator
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.