ADX strategies Explained

Date: October 4, 2005 14:00GMT 10:00EST

Expert: Adrian Aquaro, Head of Trader College LLC and True Market LLC

Topics:
- ADX - Formula
- How to Enter a trade using ADX
- Interpretation

Who is Adrian Aquaro?
Adrian Aquaro has been a trader for the last 3 years, specializing in the International Foreign Exchange Market and acting as an Introducing Broker for the Latin America market. He heads True Market Services LLC and is also the director of Trader College LLC. He has vaste experience in forex education, making of him a leader in this particular part of the financial services industry.

Speech Material:

Welles Wilder created the Average Directional Movement Index (ADX), to measure the actual trend strength, bullish or bearish. It’s important to know if there is a trend, or if the market is flat, because in this case, there are some indicators that could be more useful than other.

ADX combines +DI with –DI and then smoothes the indicator with a moving average, to measure trend strength. Because it uses +DI and –DI,

ADX doesn’t say anything about trend way. Usually, ADX above 40 shows a strong trend, and under 20 shows a weak trend. In order to choose a trend, you can take an ADX above 20.

ADX FORMULA:

+ DI = the sum of bullish directional movement averages (+DM)
                                  TR (True range)

- DI = the sum of bearish directional movement averages (-DM)
                                  TR (True range)

TR (true range) = All bullish ranges averages (today session) / n session (14 default)

ADX= (+DM) – (-DM)
         (+DM) + (-DM)

Then, we will have a rate, which will show a trend if it is over 25%.

How to enter a trade?
ADX line must be above 25 this means that there is a wide direction movement trend.

When DI + Crossed DI- bullish you have to enter in the same candle stick this means TO BUY.

When DI- crosses DI`+ bearish you have to enter the trade in the same canble stick this means TO SELL

ADX is a closed indicator and works between 0 and 100.But is not so probable to see ADX above 60.

ADX under 20 shows a weak trend or flat market, and ADX above 40 means a strong trend.

ADX Line doesn’t show trends, but only the strength of actual trend.

TRIGGERS

· Buy Trigger : +DI crosses up -DI

· Sell Trigger : - DI crosses up +DI

· ADX Under 25 says: DO NOT ENTER A TRADE

Extreme point: You have to take the maximum or minimum for the time frame you choose, where +DI and –DI have crossed. +DI will be the max or min point.

These points are used as signals, for buy or sell. For example, if price goes above extreme point, you have a confirmed buy signal. If price can’t go above it, you have to be out of the market.

Intrepretation:

Click image to enlarge:

Sell cross: -DI (red line), crosses above +DI (blue line). ADX line (green) indicates a rate over 25%.

Buy cross: +DI (blue line) above ADX line, confirming that trend has a wide moving way

Sell cross: -DI line crosses above ADX green line; these means movement is right.

ADX line crosses 40 y has a pull back: this means that trend ir probably old.

False signal and correction: ADX indicator means that you have to go out of the market, and immediately, you have a signal in opposite way

Buy cross: ADX line works with indicator, as a resistance for de +DI line, and then, price can’t reach new maximum point, and market becomes flat.

Click image to enlarge:

Buy cross: +DI above –DI and +DI crosses above ADX line and price.

40% line is a resistance for +DI and market becomes flat.

ADX line goes above 40 and a trend line of ADX line after a flat market, and then, price and volatility rise:

Click image to enlarge:

A cross under 20% and ADX line in that level doesn´t show trend movements

ADX line crosses 25%

ADX crosses 40 level and pull back, it is anticipating that trend can become weak

Session Transcript:

FXstreet Moderator (Oct 4, 2005 10:10:59 AM)
Today I am delighted to welcome back our good friend and guest speaker Adrian Aquaro of the Traders College LLc.

Adrian (Oct 4, 2005 10:11:54 AM)
Good morning, or good evening

Adrian (Oct 4, 2005 10:12:15 AM)
My name is Adrian Aquaro, and I`m very pleasured to be here again

Adrian (Oct 4, 2005 10:12:49 AM)
At first, I´ d like to thank very much to all of you for be here

Adrian (Oct 4, 2005 10:13:01 AM)
and of course, thanks to Fxstreet

FXstreet Moderator (Oct 4, 2005 10:13:17 AM)
Thank you very much Adrian Lets begin with pre reg questions

Adrian (Oct 4, 2005 10:13:34 AM)
today, we will talk about a popular indicator in technical analysis, ADX

Adrian (Oct 4, 2005 10:14:09 AM)
so, let´ s begin with the pre registered questions

Adrian (Oct 4, 2005 10:15:49 AM)
Q: Is ADX better for short or long term strategies? What time frame do you prefere to use ADX; thanks, Andrzej Zdunczyk

Adrian (Oct 4, 2005 10:16:57 AM)
A: We think that ADX is useful in all time frames, but, of course, as other indicators, when you work in long time frames, you will have few signals, but good signals

Adrian (Oct 4, 2005 10:17:58 AM)
Q: I trade in 30 minutes and 8 hour charts. What setting are best?

Adrian (Oct 4, 2005 10:19:04 AM)
A: If you refer to ADX, we think that 8 session chart is the best, for 1 hour, and 4 hour charts

Adrian (Oct 4, 2005 10:19:28 AM)
But if you work with 30 and 15 minutes charts

Adrian (Oct 4, 2005 10:19:43 AM)
we prefer to use 10 and 14 session in ADX

Adrian (Oct 4, 2005 10:20:48 AM)
Q: Using the ADX indicator, how to determine the entry and execute the price in day trading? Fath 181

Adrian (Oct 4, 2005 10:21:41 AM)
A. For example, if you take 1 hour chart, you will have bullish signal when +DI crosses -DI down-up

Adrian (Oct 4, 2005 10:22:17 AM)
so, you have to enter a trade when price is above the maximun price, taking the last candlestick

Adrian (Oct 4, 2005 10:23:06 AM)
for bearish trades, when -DI crosses +DI, and price is under the minimum price of the last candlestick, you have a bearish trade

Adrian (Oct 4, 2005 10:24:02 AM)
Q: Would it be possible to make an strategy based purely in ADX Crosses?

Adrian (Oct 4, 2005 10:24:43 AM)
A: Yes, of course you can, but actually, we recommend to use another tools, like supports and resistances, trend lines, Fibonacci, MA, EMA

Adrian (Oct 4, 2005 10:24:59 AM)
and indicators, like momentum, MACD, RSI or CCi

Adrian (Oct 4, 2005 10:26:38 AM)
Fundamental analyses (Interest rate, GDP,,, changes to drive for price movement up or down with real examples). Just teach us how can I apply fundamental parameters events to technicals charts. Thank you

Adrian (Oct 4, 2005 10:27:58 AM)
A: Well, at first, we recommend not to trade when we are close to the time of a macro news. We never know what this macro news will say, until is published.

Adrian (Oct 4, 2005 10:28:44 AM)
But, actually, we think that sometimes, there are some forecasts that could be true, so you can study what happened with each macro news in the past

Adrian (Oct 4, 2005 10:29:10 AM)
This way, you can see what could price do in the future

Adrian (Oct 4, 2005 10:29:40 AM)
For example, we have the non farm payrolls the first friday every month

Adrian (Oct 4, 2005 10:30:02 AM)
This data, usually gives about 120 point in the first 5 minutes

Adrian (Oct 4, 2005 10:30:13 AM)
and 170 points in the first 20 minutes

Adrian (Oct 4, 2005 10:30:37 AM)
Although this, we prefer to work using technical analysis

FXstreet Moderator (Oct 4, 2005 10:31:36 AM)
Thank you Adrian

FXstreet Moderator (Oct 4, 2005 10:31:47 AM)
Please post your questions now and Adrian will attempt to answer as many as possible.

js (Oct 4, 2005 10:32:28 AM)
Do most trading platforms offer +DI and -DI I only see Directional Movement, ADX , ADXR and DX . Do not see +DI -DI is this a value I figure out.

Adrian (Oct 4, 2005 10:33:29 AM)
well, I don´ t know which is your software, actually, but DX is the average direction movement, and ADXR is the % rate of change

fixer (Oct 4, 2005 10:34:48 AM)
Addition: often at the end of a trend, the ADX gets tired and makes a rounded shape. To me that's also a signal to be alert. Q: do you use double ADX? I like the ADX14 and 7 together, as the ADX 7 is faster and can signal trend change

Adrian (Oct 4, 2005 10:35:04 AM)
That` a great question

Adrian (Oct 4, 2005 10:35:44 AM)
well, we usually use a double indicator, no only ADX, but stochastics, and momentum too

Adrian (Oct 4, 2005 10:36:08 AM)
and I think is useful, because 7 session ADX is so fast, and 14 session is low

Adrian (Oct 4, 2005 10:36:28 AM)
so you can use 7 session ADX to trade

Adrian (Oct 4, 2005 10:36:37 AM)
and filter it with 14 session ADX

0mar (Oct 4, 2005 10:37:11 AM)
is the adx better applied to weekly/daily charts or hourly15min charts? are thre currency pairs where adx performs well?

Adrian (Oct 4, 2005 10:37:39 AM)
Actually, you can use ADX in all time frames

Adrian (Oct 4, 2005 10:38:20 AM)
as you could know, we prefer to trade always with small charts, so we usually use it in 30 and 15 minutes charts

Adrian (Oct 4, 2005 10:38:29 AM)
and, the second part

Adrian (Oct 4, 2005 10:38:45 AM)
ADX, like other indicators

Adrian (Oct 4, 2005 10:39:19 AM)
works better when you have a volatile pair, like GBP/USD, GBP/JPY, or EUR/JPY

yass (Oct 4, 2005 10:39:58 AM)
the extreme point its considered the highest point of the candle where the crosss acuured? thanks

Adrian (Oct 4, 2005 10:40:33 AM)
The extreme point is the highest point of the last candlestick

Adrian (Oct 4, 2005 10:41:00 AM)
if you work with daily chart, you can take also the actual candle

Adrian (Oct 4, 2005 10:41:13 AM)
but if you trade with 4 hour or 1 hour chart

Adrian (Oct 4, 2005 10:41:32 AM)
is better to take the highest price of the last candlestick

JSB (Oct 4, 2005 10:42:45 AM)
U say "enter in the same direction of the candlestick" do u mean enter at the close of the candlestick? For instance the candlestick closes higher than the previous one then enter long on the close?

Adrian (Oct 4, 2005 10:43:08 AM)
at first, you have to trade following the way of the cross

Adrian (Oct 4, 2005 10:44:26 AM)
then, you have to look at the highest price of the previous candlestick, and if the actual candle closes above the previous candle, you can enter the trade

Traderdesk (Oct 4, 2005 10:45:12 AM)
When using a ADX strategy on the daily charts for example do you combine it with S/R, Stochastics on the hourly for entries?

Adrian (Oct 4, 2005 10:45:37 AM)
Well, at first, it is better to go from big charts to small charts, so,

Adrian (Oct 4, 2005 10:46:04 AM)
if you see that the main trend is good in daily charts

Adrian (Oct 4, 2005 10:46:18 AM)
you can look for the same trend in hour chart

Adrian (Oct 4, 2005 10:46:25 AM)
and then enter a trade

Adrian (Oct 4, 2005 10:46:45 AM)
anda of course, you can combine ADX with other indicators

001 (Oct 4, 2005 10:47:13 AM)
i read that ADX is not useful during flat times, so what do you advise one to do during flat times?

Adrian (Oct 4, 2005 10:47:36 AM)
When you have a flat market, you can work using stochastics, CCI, and chartist analysis,

Adrian (Oct 4, 2005 10:47:45 AM)
fibonacci, MA, etc

sapphire (Oct 4, 2005 10:47:58 AM)
Is EUR/USD a good pair to apply ADX or not?

Adrian (Oct 4, 2005 10:48:22 AM)
yes, of course, you can use ADX in every pair

scooby (Oct 4, 2005 10:49:44 AM)
currently the rally on gbp has adx showing that this rally should continue am I interpreting this right?

Adrian (Oct 4, 2005 10:50:35 AM)
well, if you are analyzing GBP/USD in daily chart, you can see that ADX is "tired", and we can wait for a correction in the next days or weeks

M4 (Oct 4, 2005 10:51:37 AM)
is it true that rising ADX favors the combination with specific other indicators, different from decreasing ADX?

Adrian (Oct 4, 2005 10:51:37 AM)
well, i don` t know actually, let us study this cases, and you can contact us

sapphire (Oct 4, 2005 10:52:43 AM)
As I can see you don't consider EUR/USD a volatile pair. Which are the best indicators for that pair?

Adrian (Oct 4, 2005 10:53:35 AM)
actually, i consider EUR/USD as a volatile pair, but as you can see, there are some pairs that have largest movements every day, like GBP/USD, GBP/JPY, or CAD/JPY

Adrian (Oct 4, 2005 10:54:18 AM)
but I think that you can use the same indicators for all pairs, and you can modify their parameters for each one

LivingtheDream (Oct 4, 2005 10:54:46 AM)
What software do you use that shows the ADX as well as +DI and -DI as illustrated in your examples?

Adrian (Oct 4, 2005 10:55:07 AM)
we use metatrader, and the software which belongs to our broker, IFX Markets

FX (Oct 4, 2005 10:56:03 AM)
are the adx ,rsi, macd etc. fooling people into beleiveing that to make money trading you just need to be able to spot technical signal of a chart. I think people lose money because they want the chart to trade for them and do not want the hard work, research reading news etc have you found this?

Adrian (Oct 4, 2005 10:56:31 AM)
well, we think that the first thing to do in forex market is to make a trading system

Adrian (Oct 4, 2005 10:56:59 AM)
and this system is based in technical indicators, chartist analysis, fundamentals, etc

Adrian (Oct 4, 2005 10:57:31 AM)
so, i think that you have to work hard, but also you have to follow your system

Adrian (Oct 4, 2005 10:57:56 AM)
people thay lose money, don` t follow the system

FX (Oct 4, 2005 11:00:08 AM)
would you say that you trade on instinct because if you back test most well know indicators like the adx you lose money.

Adrian (Oct 4, 2005 11:01:23 AM)
sir, we always back test our system, and it shows positive results

Adrian (Oct 4, 2005 11:02:11 AM)
if you think that technical analysis is not useful, you can trade using fundalmentals, but we don`t use instinct in our analysis

yass (Oct 4, 2005 11:03:04 AM)
you said the ADX in GBP is tired its 48 and you said ADX above 40 is strong trend ? how is that?

Adrian (Oct 4, 2005 11:03:06 AM)
yes, you are right

Adrian (Oct 4, 2005 11:03:46 AM)
we said that, but sorry, when we said that ADX was tired in GBP, we must say -DI

Adrian (Oct 4, 2005 11:04:00 AM)
ADX line is about 48, of course

Adrian (Oct 4, 2005 11:04:31 AM)
if you look at -DI in daily chart, you can see what are we talking about

FXstreet Moderator (Oct 4, 2005 11:05:32 AM)
Last question:

cedc@telusplanet.net (Oct 4, 2005 11:06:40 AM)
Do you change any of the preset numbers in ADX when opening it?

Adrian (Oct 4, 2005 11:07:25 AM)
well, if you refer to big charts, you can use 8 session ADX, and if you work with small charts, like 1 hour or 30 and 15 minutes charts, you can use 10 or 14 session ADX

FXstreet Moderator (Oct 4, 2005 11:08:34 AM)
Thank you very much for that, Adrian

FXstreet Moderator (Oct 4, 2005 11:09:34 AM)
If your question was not answered during the course of this chat, please contact Adrian Email: Adrian Aquaro adrianaquaro@yahoo.com.ar

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Adrian (Oct 4, 2005 11:12:41 AM)
I´d like to thank you very much for be in this session, and I hope we well be here with all of you again very soon. Thank you again, and see you soon!!!!

FXstreet Moderator (Oct 4, 2005 11:13:16 AM)
Thank you all

Comments

[Average Directional Movement Index (ADX) link]

The trend of the ADX is what should be emphasized.

[WebHosting]

Can you tell me if the ADX gives buy and sell signals? It looks to me that it shows trending.

[Adrian Aquaro]

Dear Sir,

You can read above the point "How to enter a trade".
There is a description of the buy and sell signals provided by ADX.
Also, you can combine it with moving average, as a right filter (MA 20 or 60).
Sincerely

Adrian Aquaro

[options trader]

With ADX, do you trade in conjunction with volume?We have yet to use ADX as part of our trading signals, but we're shopping around for new ideas.

thanks

[Adrian Aquaro]

Dear Sir,

Yes, as you say, we usually use volume added to ADX signal. We think that is not a main filter, but it could be useful when the market is following a clear trend. As you probably know, the most volume shows the market, the most predictible it is.
Sincerely
Adrian Aquaro