The Average Directional Index (ADX) is a popular technical indicator used by traders to determine the strength of a trend. On BetPro Exchange, advanced application of the ADX can give traders an edge when trading assets like stocks, commodities, currencies and cryptocurrencies. This article will explore advanced ADX trading strategies, how to use ADX signals effectively, combine it with other indicators, and optimize ADX parameters for better trading outcomes.
Confirming Trends with ADX and DMIs
The ADX itself only shows trend strength, not direction. To confirm trend direction, use the Directional Movement Indicators (DMI):
- +DI – Positive Directional Indicator
- -DI – Negative Directional Indicator
When +DI is above -DI, price has an uptrend. When -DI is higher, price has a downtrend. Check DI crossovers to spot trend changes earlier.
Useful Tips
- Look for strong ADX readings above 25 to confirm robust trends
- Wait for a clear +DI/-DI crossover before entering trades
- Use longer timeframes like daily or weekly to reduce false signals
Combining ADX with Other Indicators
For better trade signals, combine ADX with:
Moving Averages
ADX quantifies trend strength, while Moving Averages (MA) define direction and support/resistance.
- Enter long when ADX is high as price breaks above a rising MA
- Go short when ADX is high and price drops below a falling MA
ADX highlighted with moving averages signaling uptrend
Bollinger Bands
Since Bollinger Bands quantify volatility, combining helps confirm robust moves.
- Look for ADX spikes above 25 as price tags or breaks Bollinger Band extremes
- Shows strong directional moves are likely to continue
MACD (Moving Average Convergence Divergence)
The MACD measures momentum. High ADX plus MACD signal line crossovers confirm high conviction moves.
- Go long on bullish crossovers when ADX is high
- Enter short trades when bearish crossovers align with high ADX
Optimizing ADX Parameters
The default ADX parameters (14 period) work well for swing trades. For other trading styles:
Day Trading
Use a shorter 5-10 period ADX to spot intraday trends faster.
Position Trading
Lengthen the period to 20-30 to reduce noise and only trade very strong trends.
No matter the parameters, always combine ADX with other signals like DMI, moving averages, or oscillators to improve accuracy.
Advanced ADX Trading Strategies
Now that we’ve covered combining ADX with indicators and optimizing parameters, let’s see some advanced strategies in action:
Extreme ADX Signals
Extremely high ADX levels signal the strongest trends:
Strategy Steps
- Spot ADX peak of 50+ on daily or weekly charts
- Confirm trend with DMIs
- Enter new trades when pullbacks align with trend
- Set wider stops to accommodate volatility
Extreme readings mark robust trends so give price room to fluctuate. Use other indicators like MACD to time entries after temporary retracements.
ADX Crosses
Just like other indicators, ADX crossover signals can reveal trend changes:
Trading Crossovers
- ADX Buy Signal: +DI crosses above -DI when ADX moves upwards
- ADX Sell Signal: -DI crosses above +DI when ADX moves upwards
The upwards ADX slope ensures strength is building in the new trend direction.
ADX crossover marked with red circle
Use these crossover signals to catch trends early. Confirm direction with moving averages or other indicators.
ADX Fades
Skilled traders also profit from trading ADX fades:
How to Trade Fades
- Look for extreme ADX highs followed by negative crossovers
- Enter shorts when +DI drops below -DI or vice versa
- Close trades when ADX starts declining from peak levels
As with other oscillators like RSI or stochastics, overbought/oversold ADX levels signal impending reversals.
Managing Risk with ADX
The ADX doesn’t only help find trading opportunities, it also aids risk management:
- Scale position size higher when ADX confirms robust trends
- Reduce size or avoid countertrend trades when ADX is low (<25)
Use ADX trends to set wider stops or trailing stops to let strong moves run their course. When ADX rolls over, tighten stops to protect capital.
Conclusion
The ADX is a versatile indicator that quantifies trend strength and complements directional systems. Combining ADX with indicators like DMIs, moving averages and Bollinger Bands leads to higher probability setups. Moreover, optimizing ADX parameters and trading crossovers or extreme readings can further improve performance.
Use the ADX to not only spot trading opportunities but manage risk smarter too. Confirm signals on higher timeframes, allow volatility expansion on spikes and protect positions once rolls over. By mastering advanced application of the Average Directional Index, traders can systematically build an edge.
Frequently Asked Questions
Q: What ADX parameter is best for day trading?
A: For day trading, shorter 5-10 period ADX will react faster to short term moves.
Q: Does high ADX guarantee a strong trend?
A: No. Always check +DI/-DI to confirm actual trend direction. High ADX only shows potential trend strength.
Q: Can you use ADX for counter trend trades?
A: Yes but with caution. Combine with overbought/oversold oscillators for best signal confirmation.
Q: Is rising ADX better or falling ADX?
A: Generally rising ADX indicates building trend strength. But extremely high ADX can signal exhaustion ahead.
Q: Should I avoid trades when ADX is very low?
A: Yes. Low ADX around or below 20 signals weak trading environment. Use other strategies or reduce size.