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Main » Articles » Trading Strategy

Trading With the Trend - ADX Strategy

The currency markets are known to trend well. At the same time, catching a trend and staying with it, is not as easy as it seem s.

Price always moves in wave motion, forming impulsive and corrective waves and m any a times a major retracement could be interpreted as a reversal, only to see the trend continue.

The market saying of "trading the pullback" would fit this situation well.

Hence, if we can identify a strong trend and correctly interpret the corrective waves of the trend as a retracement, it would make trading more profitable.

With this in mind, we shall make a system that gives us the ability to trade pullbacks in the direction of the main trend by combining 2 technical indicators.
The advantage is that the unique characteristic of each, gives us the combined interpretation that we are looking for
.
The first indicator is the ADX with the standard setting of 14. It is a trend indicator, which identifies a sustained movement in one direction. Once the ADX rises above a certain level a trend is said to have been established. You stay with trending positions longer, simply by observing that the ADX is not declining. An ADX reading of above 30 indicates that a strong trend is in place and we shall use this parameter for our strategy.

The second indicator is the Exponential moving average with a look back period of 21. The basic use of the EMA 21 is that it often acts as a dynamic barrier of support and resistance. In an uptrend price will remain above the 21EMA and more often than not, find support on the average in a continuing trend.

By combining these unique characteristics of the above two indicators we now define our parameters f or the system. We will define a long trade and the same rules apply f or a short trade by reversing the parameters.

Initially an ADX reading of above 30 is needed, which indicates that a strong trend is in place.

Once this parameter has been met and price retraces back to the 21 EMA we have a buy signal.

We enter the trade on the break of the high of this pullback bar, and place the stop below the low of the entry b ar. The exit would be when prices cross the 21EMA down.

 

And as we can see in the chart we have both long and short trades completed successfully. It is a very simple strategy with a high probability of success. Since we are going with the trend we are waiting for price to confirm our trades. The basic drawback is that it works only in trending markets and should not be used when price is range bound.
 The ADX (Average Directional movement Index) Indicator

Category: Trading Strategy | Added by: forex-market (2009-09-11)
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