Traders can create a strategy using just one indicator, the ADX. Many traders know ADX, yet it is often used in ways that are not effective. This is not just an opinion; it's a proven fact.
ADX measures trend strength. Developed by Welles Wilder, it ranges from 0 to 100. A value above 25 signals a strong trend. A value below 20 indicates a sideways market. This has been the theory, but real-world results can vary.
Trading has changed since ADX was created in 1978. Testing strategies is crucial. This strategy example uses the DAX future, Europe's top stock index. We’ll look at daily bars and use a 5-minute chart for realistic data.
In this strategy, ADX is calculated on a daily series. We will use a 5-period ADX. The script for the strategy is simple. There is an input threshold level to buy above or below. The variable defines ADX on the daily series.
Market entries follow clear rules. If ADX is above a certain level, we buy at the break of yesterday's high. Another condition ensures no new trades if trades have been made that day. The strategy is intraday, closing all positions by the end of the session. We set a $2,000 stop loss to filter out abnormal values.
Next, we test and optimize the strategy. We start with an ADX threshold from 10 to 100. Using a step value of 5, we start the optimization. Results at ADX 25, 30, and 35 show poor performance. Higher ADX values improve results but are still not great.
Changing the approach, we enter if ADX is below a certain threshold. The new results are much better. Average trades are now above $100-$130, and drawdown values are lower. At ADX 25, we see an average trade of $350 and a drawdown of $15,000.
Net profit is still below $100,000. This is due to the low number of trades. Higher ADX thresholds produce better trades but too few to be reliable. A threshold of 30 is a good compromise.
We view an example trade. The strategy buys at the break of the previous session's high when ADX is below 30. The stop loss isn't hit, so we exit at session close. The equity line shows excellent results.
Classic technical analysis rules do not always lead to good results. For DAX futures, entering when ADX is above a certain value can be inefficient. Instead, entering during a sideways phase produces remarkable results. This strategy is promising and can be refined by optimizing stop loss and take profit values.
