How to Trade the ADX Trend Trading Strategy in Olymp Trade.

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What is the ADX Trend Trading Strategy?

The ADX Trend Trading Strategy is a trading technique that uses a 2-period Average Directional Index (ADX) to catch low-risk entries in a trending market.

The strategy capitalizes on finding the perfect pause in the market, and the fact that the ADX uses a short look-back period of 2 makes it so sensitive, thus, it hardly falls below 25.

When then it falls below 25, it means that a trend breakout is looming.

The ADX Trend Trading Strategy involves taking the market trend in its context to anticipate trend breakouts.

Out of such breakouts, a trader who understands this strategy is bound to profit big time.

Being called the ADX trend trading strategy may tempt you to think that only the Average Directional Index is used. But that is not true, other trend-following indicators are blended with the ADX in this strategy.

For example, the 20-period Exponential Moving Average (EMA 20) is also used in this strategy.

What that means is that in essence, the ADX trend trading strategy is a trend trading technique that uses a 2-period ADX and a 20-period EMA to pick low-risk entries.

In addition to the use of the two indicators, the ADX trend trading strategy also utilizes price action in the derivation of trading signals.

Bearish Setup

ADX Trend Trading Setups.

You must be dying to have a sneak peek of how the ADX trend trading setups look like.

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Well, here are the specifications of bullish and bearish ADX trend trading setups:

  • Bullish Setup: The price must move from below to above EMA 20, then make a higher high than the previous high, above that EMA 20. You must then wait for ADX 2 to fall below 25 while the price remains still above EMA 20. The candlestick which coincides with ADX 2 falling below 25 as the price remains above EMA 20 is the bullish signal bar.
  • Bearish Setup: The price must move from above to below EMA 20, then make a lower low than the previous low, below EMA 20. You must then wait for ADX 2 to fall below 25 while the price remains still below EMA 20. The candlestick which coincides with ADX 2 falling below 25 as the price remains below EMA 20 is the bearish signal bar.

The above might not be enough knowledge to go about trading the ADX trend trading strategy. You must then be wondering how to get to trade this strategy profitably.

Find in this post, how to go about the ADX Trend Trading Strategy.

I’m sure this guide will contain almost all of the answers to your questions regarding the strategy.

Bullish Setup

Going About the ADX Trend Trading Strategy.

This is the section that gives you the step by step approach to the ADX trend trading strategy.

In the introduction, we just had a quick look at an overview of the strategy. However, in this section, expect an in-depth discussion about the strategy, and a guide of what you need to do, step by step.

Here are the simple steps on how to go about the ADX Trend Trading Strategy:

  1. Set Up the Average Directional Index (ADX) Indicator.

Setting up the price chart ready for ADX trend trading strategy involves two things.

The first is applying the ADX indicator and the second is applying the EMA indicator.

This step deals with the first thing in setting up the chart ready.

To set up the Average Directional Index (ADX), click on the indicators’ tab and choose ADX.

Apply it on your chart, adjusting its period to 2.

The ADX indicator will be applied on your chart, with a period of 2, and ready for use.

Proceed to the next step after this.

  1. Set Up the Exponential Moving Average (EMA) Indicator.

This step deals with the second step in setting up the chart ready.

To set up the Exponential Moving Average (EMA), click on the indicators’ tab and choose moving average.

Adjust the type to EMA and the period to 20, then apply it to your chart.

Simply that, and your price chart is ready for use in trading the ADX trend trading strategy.

The scanning for trading signals begins in the next step.

  1. Observe the Exponential Moving Average Relative to the Price.

The chart is ready.

Trading begins by the scanning of the signals to trade, and this step is the first in line in the scanning for such trading signals.

From this step, you expect either of the two outcomes between a potentially bullish signal and a potential bearish signal.

For a potentially bullish signal, the price must move from below EMA 20 to above it.

The price must then make a swing high higher than the previous swing high, while still above EMA 20.

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That will be an upward breakout of the previous swing high above EMA 20, confirming the upward trend.

For a potentially bearish signal, however, the price must move from above to below EMA 20.

The price must then make a swing low lower than the previous swing low, while still below EMA 20.

That will be a downward breakout of the previous swing low below EMA 20, confirming the downward trend.

Did you get either of the two expected outcomes? Then proceed to the next step for further signal confirmations.

EMA 20

  1. Observe the Average Directional Index Relative to the Price.

This step involves confirming the potential signals obtained in the previous step using the ADX.

You will do so by observing how the ADX indicator behaves with respect to the price.

Here are the specifications of what must happen if the signal will be considered valid:

  • Potential bullish signal: ADX 2 must fall below its 25 reading while the price must still remain above EMA 20. The candlestick which coincides with the ADX 2 falling to below 25 is the bullish signal bar.
  • Potential bearish signal: ADX 2 must fall below its 25 reading while the price must still remain below EMA 20. The candlestick which coincides with the ADX 2 falling to below 25 is the bearish signal bar.

If the respective potential signal has the above specifications happening, then it is confirmed as a valid trading signal.

You can then proceed to enter your trade.

Potential bearish signal

  1. Set Up Buy Stop or Sell Stop Pending Order.

Following a confirmed bullish signal, set up a buy stop pending order 1 pip or tick above the high of the bullish signal bar.

Here are all the conditions which must be met for a buy stop pending order to be set up:

  • The price must move from below to above EMA 20.
  • The price must make a swing high higher than the previous swing high, while still above EMA 20.
  • ADX 2 must fall below its 25 reading while the price still remains above EMA 20.

On the flip side, set up a sell stop pending order 1 pip or tick below the low of the bearish signal bar following a confirmed bearish signal.

Here are all the conditions which must be met before setting up a sell stop pending order:

  • The price must move from above to below EMA 20.
  • The price must make a swing low lower than the previous swing low, while still below EMA 20.
  • ADX 2 must fall below its 25 reading while the price still remains below EMA 20.

Also Read: – How to Set Up the Yum-Yum Continuation Trading Pattern in Olymp Trade.

  1. Adjust Stop Loss and Take Profit.

Place the Stop Loss for buy order just below the low of the bullish signal bar.

On the other hand, place the Stop Loss for the sell order just above the high of the bearish signal bar.

Your Take Profit should never fall below twice your risk.

Target at least twice what you risk with your Stop Loss.

Furthermore, because it is a trend trading strategy, some traders prefer to trail their Stops to gain maximally as the trend grows.

  1. Cancel Order if Not Triggered.

Yes, you have set up your trade and all.

However, if the trade is not activated in the next candlestick after the signal bar, cancel it.

Breakouts must show a sense of market urgency and when they don’t, then they may trigger unprecedented events.


*Risk warning:

The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.
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Kenn Omollo is an investment writer and a business management consultant at Joon Online Limited. Reach him at - kenn@joon.co.ke

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