Investing & Trading

ADX Breakout LE Strategy

By Samantha Baltodano


TL;DR:

The ADX Breakout LE strategy is a stock trading strategy that helps identify high-volatility breakouts. It uses the Average Directional Index (ADX) indicator to spot potential breakout opportunities. 


To use the strategy, you should look for stocks that meet specific criteria, such as the ADX crossing above 40, and the price being at its 15-day highest value. When these conditions are met, you can enter a simulated long order to take advantage of the breakout. It is important to note that this strategy is long entry only, and other strategies should be used for exits.


Test The ADX Breakout LE 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 Breakout LE Strategy.


What Is The ADX Breakout LE Strategy?

Are you interested in trading stocks? Do you want to learn about a strategy that could help you spot high-volatility breakouts and take advantage of them? 


If yes, then the ADX breakout strategy might be just what you need!


The ADX Breakouts LE strategy was developed by Ken Calhoun and is based on the Average Directional Index (ADX). This strategy is designed to identify stocks that meet certain price range criteria using the ADX Breakouts Filter study. The ADX is a popular indicator used to measure the strength of a trend, and high ADX values are believed to indicate high levels of volatility.


Using the ADX breakout strategy can help you identify potential breakout opportunities and take advantage of them. 


Formula and Calculation

The ADX Breakouts strategy uses the Average Directional Index (ADX) indicator to identify high-volatility breakouts in stock prices. 


Here's how to calculate the ADX and use it in the strategy:


Calculate the Directional Movement Index (DMI):

  1. The +DI (Positive Directional Index) is calculated by finding the difference between the high price of the current period and the high price of the previous period. If the difference is positive, the value is used. If it's negative, the value is set to zero.
  2. The -DI (Negative Directional Index) is calculated in the same way, but using the low prices instead.
  3. The true range (TR) is calculated as the maximum of the following three values: the high minus the low, the absolute value of the high minus the previous close, and the absolute value of the low minus the previous close.


Calculate the Directional Movement Rating (DMR):

  1. The +DMR (Positive Directional Movement Rating) is calculated as the exponential moving average (EMA) of the +DI values for a certain number of periods (e.g., 14).
  2. The -DMR (Negative Directional Movement Rating) is calculated in the same way, using the -DI values.
  3. The Average True Range (ATR) is calculated as the EMA of the TR values for the same number of periods.


Calculate the ADX:

  1. The Directional Movement Index (DMI) is calculated as the absolute value of the difference between the +DI and -DI values, divided by the sum of the +DI and -DI values, and multiplied by 100.
  2. The ADX is calculated as the EMA of the DMI values for the same number of periods.


Trade Signals

To use the ADX Breakouts strategy, you should look for stocks that meet the following criteria:


  1. The ADX has crossed above 40, indicating high levels of volatility.
  2. The price is at its 15-day highest value (or a customizable value).
  3. The price exceeds the recorded high price by a certain amount (default is 50 cents).


When these conditions are met, you can enter a simulated long order to take advantage of the breakout. 


Note that this strategy is long entry only, so you'll need to use other strategies for exits, such as a Trailing Stop Loss order.


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It is important to remember that no strategy is foolproof, and there is always risk involved in trading. It is essential to do your research and use proper risk management techniques to minimize your losses.


Summary

  • The ADX Breakouts LE strategy uses the Average Directional Index (ADX) to identify high-volatility breakouts in stock prices.
  • The ADX is calculated using the Directional Movement Index (DMI) and the Directional Movement Rating (DMR).
  • To use the strategy, you need to look for stocks that meet certain criteria, such as the ADX crossing above 40 and the price being at its 15-day highest value.
  • The strategy is long entry only, so you'll need to use other strategies for exits, such as a Trailing Stop Loss order.


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


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