Why ADX > 20 Is a Lie + Easy Trading Method

**daedalus** · 04-26-2009, 11:58 AM

Its been awhile since i've posted on here but I appreciate the positive feedback from all of you who have read and used my Fib Retracement method in the Swing Trade sub forum.

Recently i've made somewhat of a paradigm shift in how I trade (and simplified things about 10x's over) but I wanted to share a small observation I have made concerning "trending" markets and ADX readings.

First off, let me preface this by saying if you are a pure trend trader looking for MA cross overs or something into a bigger trend then this might not help you. For the rest of us going short and long based off S/R, trendlines, or Fibs then this will be relevant to you!

Ok, so we are all told from various software vendors, trading forums, trading websites, educational vendors that the GOOD trades are in trending environments correct? We are told to wait for the ADX to be > 20 to take a trade? Because then we know the market is trending right? I'm here to argue that this SIMPLY IS NOT TRUE. In fact - its the opposite.

I argue that the prime time to look for entries is in fact when the ADX < 20 and by definition the market is NOT in a trend. Think about it like this: If you are getting into a move when the ADX > 20 you are by definition jumping into a position after price has ALREADY MOVED A GOOD DISTANCE IN ONE DIRECTION. Thus, its probability of that trend stopping and a reversion to its mathematical mean is much much more likely which means a move against you is much much more likely as well.

Now on the other hand, by getting into a trade when the ADX < 20 we are saying that we want to be in the move BEFORE ITS OCCURS and let us make profit while the ADX is increasing and the TREND is increasing.

Here are some examples from Friday on the EURUSD 1 minute chart. The indicator on the chart shows nothing other than a GREEN BAR if the ADX < 20 and a RED BAR if the ADX > 20. i.e. we only are looking for positions when there are green bars.

First thing to note - IF you trade like this it will be some of the easiest most carefree trading you've ever done. Why? Because ADX filters 70-90% of the price action on most days. And you sit and wait without a care in the world. I have the indicator set up to alert me when the ADX drops below 20 so I get a message saying pay attention and then we look for trades. This will DRASTICALLY reduce trade amounts, increase efficiency, reduce commissions, and eliminate the possibility of overtrading a market. Lets face it folks - most of us aren't good enough to be 100% on every swing 100% of the day. It gets us into trouble and we all know it. So why fight it? Especially if you can filter 70-90% of the day and only focus on tiny points on the chart where the probability for a trend developing is in your favor?

I apologize for the size of these charts but nothing peeve's me more than someone posting a chart example thats too small to see. You should have no issues here.

These examples will be nothing more than trendline breaks snapped to a Pivot High/Low reading on the charts. Entries on breaks of the trendlines with the ADX < 20. NOTHING ELSE. You decide the management and targets but it would be pretty hard to lose money here.

You are jumping in at the momentum shift BEFORE THE TREND OCCURS.

Now take a look at the entries where the ADX > 20 and the pundits would like to tell us its a GREAT TIME TO LOOK FOR TRADES. Almost everything loses.

Coincidence? That's for you to decide. I don't think it is coincidence. In fact this is exactly how I trade from here. ADX and trendlines. Call it a day and make money. Only we can complicate the hell out of it "looking for the trend". The truth is the trend is relative, and thus WE DEFINE IT. And if that's the case, everyone else has a difference definition and no one can be right or wrong. So why bother? Swing your middle finger up at the "trend" and forget about chasing it. Its a fruitless effort and a lie, and one that hasn't made too many of us rich.

Think its a fluke? Go look at it yourself. I'm sure someone here can code up a similar indicator in MT4 with alerts in no time.

ADX and trendlines. The only tools you need to make yourself rich.

Cheers!

**PipTiamat** · 04-26-2009, 05:27 PM

very interesting observation. do you only use it on short timeframes? would be a interesting way to trade.

pt~

**daedalus** · 04-26-2009, 07:26 PM

Same concept is valid on any time frame.

**leojq2** · 04-26-2009, 08:47 PM

Thank you for this. It looks interesting.

I have Tradestation but don't know how to get the ADX Modified indicator.

Can you help with that?

Thanks again,

LJ

**daedalus** · 04-26-2009, 10:22 PM

the ADX modified indicator is something i coded up.... just use the normal adx indicator with a horizontal line of 20 placed on it and you'll have the same info!

**dpaterso** · 04-27-2009, 02:19 AM

Hey daedalus,

Nice (and accurate) observations.

As you know: I myself have made my 'lifes trading work' a study Wilder's work. During my 'travels' I was made aware Chuck LeBeau's website (who, from what I gather, has 'narrowed' his OWN study of Wilder's work to ONLY ADX and, again from what I gather, has been using and 'tweaking' ADX for the past twenty years or so).

Here is a link to an article on his website (which addresses the very same 'issue' that you describe):

Direction is the Key to Using ADX Correctly

There are many more. Take a look for interest sake.

One thing though: to say that ADX must be > 20 to indicate a trend is a 'lie' is a bit 'harsh' though. Let me put it this way: be very careful with ADX. We (all of us on the 'Wilder thread') spent MANY MANY hours back testing ADX on various instruments (both 'automatically' and 'paper trading') and I'll tell you that simply ignoring the values of ADX (and / or ADXR) (or should I say trying to use trend following systems when ADX and / or ADXR are < 20) is a SUREFIRE recipe for absolute disaster ESPECIALLY on the daily time frame. As an example: ADX would have absolutely 'cleaned up' between August 2008 and (around) December 2008 (GBP/JPY as an example) BUT between January 2005 and August 2008 you BROKE EVEN while at the same time suffering HUGE drawdowns along the way. That's a VERY long time to wait for profits!!! That said: I believe your intention really is to use it as a 'break out system' on much shorter time frames in which case you should be 'good to go'.

Regards,

Dale.

**daedalus** · 04-27-2009, 10:27 AM

Right on Dpaterso! As I mentioned, if you're method is a trend following system then by all means you need to respect (and look for) and ADX > 20. I personally have just become disalusioned with trying to find the "trend" at any given time and thought this seemed as simple and straightforward as it gets.

But you're right, this is a "break out system" of sorts which is why it meshs so well with low ADX readings.

Thanks for the input! Cheers!

BTW - heres a nice trade a couple of minutes ago in the NQ that was good for a couple hundred a contract. I got out early at my profit targets per my rules but a profits a profit!

Cheers!

**dpaterso** · 04-27-2009, 12:17 PM

It's funny you know,

I SWEAR that somehow, somewhere, we're all 'connected'!!!

Not any longer than three weeks ago I also modified MY 'ADX Oscillator' to NOT show the rising and falling and deceleration of ADX because I was finding that there were just far too many 'signals' that I could 'rationalize' for myself before taking a trade (and I was MOSTLY wrong in my 'rationalization' of course). Now MY ADX Oscillator is simply a set of red and green bars of equal length (above and below a zero line) (well: red and blue i.e. I've gotten somehow tired of green) and I'm finding that I'm doing OK for the first time in a very long while. I just had to comment after I noticed your modified version of ADX (although I'm still using ADX to detect trends and not breakouts).

Nice trade though. Nicely done!!!

Regards,

Dale.

**daedalus** · 04-27-2009, 01:47 PM

lol... I know exactly what you mean about green!

Cheers Dale!

**kohorok** · 04-28-2009, 11:38 PM

Hi Dae,

I have been searching for your ADX indicatorr, but I cant find it.

May I know where I can download it?

phymath999

Thursday, October 4, 2012

must ADX filters 70-90% of the price action on most days

Thread: Why ADX > 20 Is a Lie + Easy Trading Method

LinkBack

Thread Tools

Display

Why ADX > 20 Is a Lie + Easy Trading Method

ADX Modified?

Where can I find?

Posting Permissions

No comments:

Post a Comment