Investing & Trading

ADX Trend Strategy

By Samantha Baltodano


TL;DR:

The ADX Trend strategy is an investment strategy that uses the Average Directional Index (ADX) indicator to make decisions based on trends.


The ADX measures how strong a trend is, with values below 20 indicating a weak trend and values above 40 indicating a strong trend. The strategy uses default threshold values of 20 and 40.


Once the strategy has determined that a stock is in a trend, it looks at the stock's close price and moving average to make trade signals. If the close price is above the moving average, the strategy suggests buying the stock, and if it is below the moving average, the strategy suggests selling the stock.


The strategy also has rules for when to sell the stock, such as if the close price crosses below its moving average. Overall, the ADX Trend strategy can be a useful tool for investors looking to make informed decisions about buying and selling their investments based on trends.



What Is The ADX Trend Strategy?

The ADX Trend strategy is a way to make investment decisions based on a trend following indicator called the Average Directional Index (ADX).


The ADX indicator measures how strong a trend is. The ADX Trend strategy looks at the values of the ADX and makes decisions based on them.


The ADX is an oscillator that fluctuates between 0 and 100. Values below 20 indicate a weak trend, values above 40 indicate a strong trend.


For the sake of the ADX Trend strategy, the higher threshold is set at a default ADX value of 40 and the lower threshold is set at an ADX value of 20.


So how does it work? 


The ADX Trend strategy has some rules that it follows to make decisions. 


First, it looks at the value of the ADX indicator. If the value is higher than the default lower threshold (20), and it's also higher than a certain multiplier times its own lowest value, this is a sign that a trend is beginning to form. This means the price of the stock is either going up or down consistently over time.


If the ADX value is higher than a higher threshold level (default of 40) but lower than the maximum level, this means the trend is very strong. In this case, the strategy might be even more likely to suggest buying or selling the stock.


Once the strategy has decided that the stock is in fact in a trend, it looks at the close price of the stock. Trade signals for this strategy are determined using this close price and a moving average of your choice. This can be Simple, Exponential, Hull, Wilder’s, or Weighted.


The trade signals are as follows:

  • If the close price is higher than its own moving average, this is a sign to buy the stock. 
  • If the close price is lower than its own moving average, this is a sign to sell the stock.


But the strategy doesn't just buy and sell stocks and then forget about them. It also has rules for when to sell the stock. 


  • If the close price crosses below its moving average, the strategy will suggest selling the stock. 
  • If the close price crosses above its moving average, the strategy will suggest buying the stock again.


While this strategy may seem complex, it can be a useful tool for investors looking to make informed decisions about when to buy or sell their investments.



Test The ADX Trend Strategy

Great news! 


You can back test this exact strategy on historical data for any of your favorite symbols using TradingView. 


This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.


If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the ADX Trend Strategy.


Summary

  • The ADX Trend strategy uses the Average Directional Index (ADX) indicator to make investment decisions based on trend following.
  • The ADX indicator measures trend strength and fluctuates between 0 and 100. Values below 20 indicate weak trends, and values above 40 indicate strong trends.
  • The strategy follows certain rules to make decisions, such as looking at the ADX value to determine if a trend is forming or if it's already strong.
  • Trade signals are determined by the close price of the stock and its moving average. The strategy suggests buying the stock if the close price is above its moving average and selling it if the close price is below its moving average. The strategy also has rules for when to sell or buy the stock again.


ADX Trend Strategy is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.


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