last week i came across a video on
youtube where an adx trading strategy
was discussed i was surprised as the
author of the video claimed that this
strategy works 92 of the time
that's probably a very profitable
strategy but what if we back test it
using an expert advisor
are we looking at a holy grail strategy
continue watching to know and don't
forget the usual thumbs up if you enjoy
this kind of video
[Music]
all forex traders strive to build their
profitable strategies but this day is
your lucky day we're going over a simple
adx strategy with some examples for you
to practice this trading method
this strategy seems to have a success
rate of 92
so basically if you place 100 trades 92
of them will end up hitting the take
profit let me first share with you this
strategy before we back test it using an
expert advisor
no worries i'll share with you the
expert advisor for absolutely free
especially if it does work
without any further ado let's get into
it
the principles of the average
directional index or adx can apply to
almost all tradable assets including
forex pairs stocks mutual funds and even
futures contracts adx has become an
exceptionally useful indicator for
traders as it helps determine when the
price is trending strongly
in many cases it's the ultimate trend
indicator
after all the trend may be your friend
but it sure helps to know who your
friends are
before we go any further
let's add the indicator to our chart
if you're on trading view you can simply
hit on indicators and search for the
directional movement index
once you find it simply double click it
and you'll notice that it's been added
to your chart
the directional movement index dmi is a
technical indicator that measures both
the strength and direction of a price
movement and is intended to reduce false
signals
dmi helps in determining the price
direction and the strength of the
movement it does so by comparing the
current price with previous lows and
highs drawing lines of positive
directional movement plus d i
and negative directional movement
negative d i
in general the larger the spread between
the two primary lines plus d i and
negative d i the stronger the price
trend
if plus d i is way above negative d i
the price is on an uptrend
on the other hand if negative di is way
above plus di then the price trend is
strongly down
the adx measures the strength of the
trend either up or down
a reading above 25 indicates a strong
trend
many traders will use adx ratings above
25 to suggest that the trend is strong
enough for trend trading strategies
conversely when adx is below 25 many
will avoid trend trading strategies and
will probably wait for a breakout or
simply use a sideways trading strategy
if you're using a momentum trading
strategy and the adx rating is above 50
you might avoid exiting the market as
there are high chances that the trend
will continue
the adx trading indicator is a dynamic
way to look at the price action
as you can see here low adx is usually a
sign of accumulation or distribution
when adx is below 25 for more than 30
bars price enters range conditions and
the price patterns are often easier to
identify especially on high time frames
price then moves up and down between
resistance and support to find selling
and buying interest respectively
from low adx conditions the price will
eventually break out into a trend
that's the usual phrase that follows any
price consolidation
for example we can see here that the adx
rating moved above 25 and the price
breaks out into a clear uptrend
before we begin back testing this
strategy let's look at the buy and sell
conditions
let's begin with a buy scenario
first we need to look for a strong trend
confirmed with the adx value greater
than 25
once a strong trend is confirmed we'll
go long when plus di crosses above
negative di which is the condition for
an upcoming uptrend we exit the trade
once negative di crosses below plus di
let's look at an example here i'm going
to increase the thickness of the adx
line to help us distinguish it from the
other two lines
the adx line is in red and plus di and
negative di are in blue and orange
respectively
we can see here the plus di line crossed
above the negative di1 and the adx is
above 25
we go long immediately we can see that
the price continues its upward momentum
the two directional lines cross over
here which is the moment to exit our
position
this was a successful trade
now let's look at a short setup this is
the pound usd daily chart we can see
that the negative di crossed above the
plus di line and the adx indicator is
above 25
we go short immediately and exit the
market when the two lines cross over
again
let's see what happens next
well that's another successful trade
now it's time to test this strategy
using an expert advisor
according to the author of this strategy
the setup works best with the euro usd
pair on high time frames
this is the indicator made according to
this strategy i'll share with you the
link to download it at the end of the
video after revealing the final results
so let's adjust the settings we'll use a
1 000 virtual balance and allow the ea
to place a buy and sell position other
than that i want you to choose 14
periods value for the adx and 25 as our
entry filter
finally let's place trades with a fixed
volume of 3 micro lots
that way we can remain longer in the
market and get an accurate drawdown
value
once done simply click ok
now we'll adjust the time range we're
back testing on the daily chart so let's
go for a three years time interval
once done simply hit on start
i'm going to speed up the process as
usual while waiting don't forget to hit
the thumbs up and leave a comment with
the strategy you want us to review in
our coming videos
we've just completed back testing this
strategy let's look at the results
we can see that we had 33 trades and the
success rate is only 39.39
which is extremely different from the 92
percent claimed by the author of the
strategy
the drawdown is 65.5 percent which is
incredibly high
we've lost more than 446 dollars
i think we can all agree that the dmi
crossover strategy doesn't seem to work
with the rules mentioned earlier
but i noticed something
if we check the trades list we'll notice
that the profit made out of the
successful trades is extremely low as
compared to the amount of money we lost
in the losing one
maybe if we go for a fixed take profit
and stop loss this strategy will work
better
let's do some changes and run the back
testing process again
we'll go for a 1 to 2 risk to reward
ratio this time so we'll choose 30 pips
as our stop loss and 60 pips as a take
profit
we'll leave the other settings as they
are
let's run the back testing process again
and see the difference
these are the final results
we can notice that the strategy is
profitable now
again we had 33 trades in total
15 of them ended up hitting the take
profit which gives us a success rate of
45.45
the drawdown recorded is fantastic
six point one seven percent is a healthy
rate and we managed to make a profit of
101.29
this isn't enough to say that this
strategy is profitable at the moment
plus the low number of trade
opportunities is a big challenge
now we need to analyze the losing trade
and adjust the strategy accordingly
let me know in the comments section if
you want me to make a second part where
we try to optimize the strategy and come
up with a solid one that we can all use
to trade forex or other financial
markets
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happy trading
you