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Directional Movement Index

ADX is an oscillating indicator, displayed as a single line, ranging from 0 to 100, it only indicates the strength of the trend and does not indicate its direction. In other words, the ADX is non-directional, meaning that it measures the strength of a trend, but doesn’t distinguish between uptrend and downtrends. So, during a strong uptrend, the ADX rises and during a strong downtrend, the ADX also rises.
Here is how you correctly read what ADX is saying about the market. Here are 5 aspects regarding the interpretation of the ADX:
  • 1- When ADX is above 25, trend strength is strong. Usually, once the ADX gets above 25 this signals the beginning of a trend. Big moves (upwards or downwards) tend to happen when ADX is right around this number. You can experiment with this number, some traders that want faster signals, tend to use a 20 threshold when trading with the ADX .
    2- When ADX is below 25, traders must avoid trend trading strategies as the market is in accumulation or distribution phase. So, when we see the ADX line below 20 or 25 level, we forget about trend following strategies and we apply strategies suitable for a ranging market.
    3- When ADX is above 25 and Positive Directional Movement Indicator ( +DMI ) is above the Negative Directional Movement Indicator ( -DMI ). ADX measures the strength of an uptrend. The crossover between the 2 Directional Movement Indicator, as the ADX line is well above 25 can result in an excellent bullish move.
    4- The Positive Directional Movement Indicator ( +DMI ) should be above the Negative Directional Movement and the ADX should be above 25 signals for a strong upward trend for long opportunities. When ADX is above 25 and Positive Directional Movement Indicator is below the Negative Directional Movement Indicator, ADX measures the strength of a downtrend and short opportunities.
    5- Values over 50 of the ADX indicate a very strong trend

There are pros and cons of ADX .

So, why is the ADX useful for traders: First, is excellent at quantifying trend strength. Also, it allows traders to see the strength of bulls and bears at the same time. It is good at filtering out trades, during accumulation periods and is good at identifying trending conditions.

But the ADX also has its limitations. The most important disadvantage is the fact that ADX is a lagging indicator that follows the price, so we must be very careful when we apply this indicator, because we might miss the inception of the trend and join it when it’s nearly over.

Also, it offers many false signals when used on shorter time frames, so it’s advisable to trade it on higher time frames Also, the ADX does not contain all of the data necessary a for proper analysis of price action, so it must be used in combination with other tools or indicators.

Now that we fully covered the good and the bad regarding ADX , let’s see how it is used in a trading strategy.
The trading strategy involves a DMI crossover, confirmed by ADX above consolidation threshold. If +DMI crossover, we take long position and if -DMI crosses over, we take a short position.

Candles are re-colored for easy demonstration of uptrend, downtrend and consolidation periods.

Green candlesADX > Consolidation Threshold and +DMI > -DMI
Red candlesADX > Consolidation Threshold and +DMI < -DMI
Black candlesADX < Consolidation Threshold

Repaint – This is a non-repainting strategy - All the signals are generated at candle closing. All the calculations are made on previous candle’s open, high, low, close. No request security function is used. No data is being used from higher time frame. Trade exit uses close function instead of exit to avoid limit orders. Only one long trade at a time (no pyramiding) is allowed.

Strategy Time frame – D (To filter out false signals, higher time frame is recommended)
Strategy For – Swing Traders
Assets – Cryptocurrencies + Stocks
Notas de Lançamento: Ichimoku Kinko Hyo's Kumo cloud is added for better trade exits, more indicators can be used to aid entry and exit points. But too many can over-fit data and will miss big moves. Less losses results in, lesser profit and more over-fit strategy, that will not work on all the instruments and also it will most likely to miss big moves.

Strategy now has short trades as well. Short (E/X) and Long (B/S) trades are labelled as well, in case long exit and short entry coincides.
Script de código aberto

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