Trading Strategies Series Part 3

 Intraday With MACD & ADX Indicator

Welcome everyone. Continuing our Trading strategies Series, this is our 3rd strategy for playing with the indicators for Day Trading.

If you haven't seen the first two please don't miss out and check our blog.

Today we will talk about combining the MACD and ADX indicators.

MACD

Basically the MACD uses the difference between two exponential moving averages to determine the direction of the trend and its momentum. Using this with the EMA of the MACD itself (the signal line), and we have a dependable indicator.

 

ADX
The main aim of the ADX indicator is to measure the strength of the direction without any reference to direction. The trend is considered strong if the indicator reaches above the 25 line. On the contrary, if the indicator is below the 25 line, then the trend is weak or the market is not trending. The ADX signals over 30 demonstrate the strong trend to happen – it is definitely the best time to get into the trade.

Traders sometimes prefer to make the use of all three lines of this indicator: ADX, +Di and –Di lines, they interpret the cross of these lines as the additional signal of a possible reversal. And we will be using this exact feature of the ADX in our strategy.

The MACD-ADX Deadly Combination
The MACD is going to detect the trend reversals, while the ADX is showing either the trend is strong or fading. 

Trade Setup

Time frame: We will use 15 mins time frame to implement this strategy.

Indicator settings: MACD(default settings: 12, 26, 9) & ADX(default: 14).

Buy Entry Rules

• MACD rises above zero.
• To confirm the signal D+ line of the ADX indicator higher the D- line.
• ADX line is above 20 and rising upwards.

Stop Loss/Take Profit: Set the Stop Loss/Target Price over/below the closest swing high/low.

Sell Entry Rules

• MACD is below the zero line.
• To confirm the signal D- line of the ADX indicator higher than the D+ line.
• ADX line is above 20 and rising upwards.

·     On the candlestick where these three conditions are met, you open the Short trade.

     Stop Loss/Take Profit: Set the Stop Loss/Target Price over/below the closest swing high/low.

Tips for using the strategy to make it more effective

·         There are several ways to read ADX indicator, that if the ADX crosses the 20 level – then the trend is getting stronger, if the ADX is over 30 – the trend has gained even more power.

·         Aggressive traders can get into the trade when the ADX is below the 20 line, so it gives the possibility to catch the growing trend and not to miss the beginning of it. The basic idea is that the more mature trend is the more possible is the reversal;

·         Traders must observe that the cross of the 20 line is not as important as the slopes of the indicator and its direction. Hence, this is not a purely system trade, but some observation and discretion is warranted.

·         You must experiment and find your own way to read the indicators and adjust them according to your trading needs. The best way to find out is to back test any of these settings and pick the one that will work the best for you.

·         Take Profit and Stop Loss. We mention in every trade to have a risk reward ratio of 1:2 at least.                                                                                                                                             

    Connect with OptionsTraders to see the live action using these strategies.