Advanced ADX – indicator for MetaTrader 4

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Advanced ADX - indicator for MetaTrader 4

fabio77

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Advanced ADX indicator.

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Advanced ADX indicator

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Sergey Golubev
newdigital | 5 Jun 2014 at 12:02

Forum on trading, automated trading systems and testing trading strategies

Indicators: Average Directional Movement Index Wilder

newdigital, 2013.08.29 16:55

Average Directional Movement Index (ADX)

Developed by J. Welles Wilder

The ADX is a momentum indicator used to determine the strength of a price trend; it is derived from the DMI –Directional Movement Index which has two indicators

+DI- Positive Directional indicator

–DI - Negative Directional Indicator

ADX is calculated by subtracting these two values and applying a smoothing function, example a function of ten to come up with a 10 period ADX.

Advanced ADX - indicator for MetaTrader 4 1

The ADX is not a directional indicator but a measure of the strength of the trend. The ADX has a scale of Zero -100.

The higher the ADX value the stronger the trend.

ADX value below 20 indicates that the market is not trending but moving in a range.

ADX value above 20 confirms a buy or sell signal and indicates a new trend is emerging.

ADX value above 30 signifies a strong trending market.

When ADX value turns down from above 30, it signifies that the current trend is losing momentum.

ADX indicator combined with DMI- Directional Movement Index

Since the ADX alone is a directionless indicator it is combined with the DMI index to determine the direction of the currency pair.

 

ADX indicator and DMI Index
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When the ADX is combined with DMI index a trader can determine the direction of the trend and then use the ADX to determine the momentum of the forex trend.

Technical Analysis of ADX indicator

Buy Signal

A buy signal is generated when the +DI is above –DI, and the ADX is above 20

The Exit signal is generated when the ADX turns down from above 30.

Advanced ADX - indicator for MetaTrader 4 3

Sell Signal

A short signal is generated when the –DI is above +DI, and the ADX is above 20

The Exit signal is generated when the ADX turns down from above 30.

Advanced ADX - indicator for MetaTrader 4 4

 

Example :

Below is a strategy using a Simple Moving Average crossover of the 50 and 20 period on an Hourly chart of the EUR/USD. The rules of the strategy are easy, buy when the 20 period crosses above the 50 period, and sell when the 20 period crosses below the 50 period.This crossover strategy thrives in trending markets but suffers in ranging markets.

The signals that occurred while the ADX was above 30 were much more reliable. We took out all of the trades where the EURUSD was moving sideways and only opened trades during the long trending moves up or down. You might have also noticed that some of the winning trades were filtered out along with the bad trades, but this is ok. Overall, we cut out more losing trades than winning trades so it was an overall positive filter to this trending strategy.
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