The 2-Period ADX Trend Trading Strategy uses a simple tweak of a popular indicator finding low-risk, high-reward trend entries.
J. Welles Wilder pioneered an array of popular indicators (ADX, Parabolic SAR, RSI) in his book, New Concepts in Technical Trading Systems. The 2-period ADX is our tweak of Wilder’s ADX indicator to enhance its prowess for day traders. In the 2-period ADX Trend Trading Strategy, we are using a 2-period ADX to catch low risk entries in a trending market.
The concept underlying the 2-period ADX is to find the perfect pause in the market. By using such a short look-back period for the ADX indicator, it becomes extremely sensitive. Hence, it rarely falls below 25. When it does, it is a signal that a break-out is imminent.
Learn:The Logic Of The 2-Period ADX
In this trading strategy, we will analyze the trend context to anticipate the break-out direction.
From below the 20-period EMA, price makes a higher swing high above the 20-period EMA.
2-period ADX falls below 25 but price is still above EMA. (signal bar)
Place buy order one tick above the high of the signal bar.
Cancel order if not triggered by the next bar.
Bear Trends
From above the 20-period EMA, price makes a lower swing low below the 20-period EMA.
2-period ADX falls below 25 but price is still below EMA. (signal bar)
Place sell order one tick below the low of the signal bar.
Cancel order if not triggered by the next bar.
2-Period ADX Trend Trading Examples
Winning Trade - Bullish Entry
This is a 5-minute ES chart showing a nice bullish trending session. The purple line is the 20-period EMA, and the lower panel shows the 2-period ADX.
From below the moving average, price rose and broke above a swing high. That was our signal that a bull trend has begun.
After rising for several bars, price started to pullback. The pullback consisted of many narrow range bars which stayed above the EMA. The bullishness remained intact.
The 2-period ADX fell below 25. We bought as price broke above the high of the signal bar.
By placing our stop just below the low of the signal bar, our risk was small. Even with a conservative target price, we could obtain a high reward to risk ratio.
In addition, the 2-period ADX offered a second entry in the later part of the session. That entry was another low-risk entry into the bull trend.
Losing Trade - Bearish Entry
This is another 5-minute chart of ES futures. In this case, the first signal resulted in a loss.
Price fell below the EMA and broke a swing low, giving us the signal to look for shorts.
After pushing below the support, the bearish momentum waned. The bearish candlesticks had small bodies. Eventually, a strong bullish bar ended the fall. However, the bullish bar had no follow-through. Instead, price drifted horizontally along the earlier support which has flipped to become a resistance.
In the sideways trading range, we had two 2-period ADX signals. The first signal failed almost immediately.
However, the trade risk was low. Hence, the potential profits from the second ADX signal more than made up for it.
Review - 2-Period ADX Trend Trading Strategy
The 2-period ADX is an excellent way to find low-risk entries into market trends. Most signal bars are narrow range bars, and its extreme offers a reliable stop-loss level.
The main drawback of the 2-period ADX is that we might get caught in tight trading ranges. However, by combining the 2-period ADX signal with the market bias we identified with price action, we limit our entries to potential new trends. Not only does this method keep us with the trend, it also helps us to avoid false break-outs.
Another characteristic of the 2-period ADX signals is that they occur infrequently. It teaches the virtue of patience in trading. Instead of jumping into a trend as it’s speeding away, exercise patience and join the train during its perfect pause.
Feel free to use your own trend filters instead of what we suggested. The key is to find potential new trends. The signals do not work as well in mature trends.
← The Secret To Using ADX IndicatorCamelback Trading Technique →
2-period ADX trading strategy. The 2-period forex trading strategy helps traders identify breakouts in the market and provides them with ideal price orders to long a trade after a bearish trend ends and reverses in a bullish breakout and short trades after a bullish trend ends and reverses in a bearish breakout.
The traditional setting for the ADX indicator is 14 time periods, but analysts have commonly used the ADX with settings as low as 7 or as high as 30. Lower settings will make the average directional index respond more quickly to price movement but tend to generate more false signals.
The strategy gives a probable buy signal when 2-period RSI goes below 10 (lower the better) which is regarded as highly oversold. Similarly move above 90 generates sell signal (of course higher the better) which is seen as a highly overbought zone.
The ADX Indicator actually works best when combined with other technical indicators. One of the best combinations is with the Relative Strength Index, or RSI. Because the ADX measures the intensity of the trend the RSI can help with entries and exits by giving a time based component to the trend.
This indicator calculates the moving average of the expanding price range over a certain period, usually 14 days. ADX has a value that fluctuates from 0 to 100, with limits generally between 20 and 50. The ADX value below 20 indicates a relatively weak trend, while values ?? above 50 indicate a very strong trend.
The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy.
ADX clearly indicates when the trend is gaining or losing momentum. Momentum is the velocity of price. A series of higher ADX peaks means trend momentum is increasing. A series of lower ADX peaks means trend momentum is decreasing.
In the event that market conditions change, an investor may implement a stop order to limit their downside exposure to a loss that only represents 2% of their total trading capital. Even if a trader experiences ten consecutive losses, using this investment strategy, they will only draw their account down by 20%.
What Is the 2-Period RSI Strategy? Larry Connors developed the 2-period RSI strategy, a fairly simple mean-reversion trading strategy designed to buy or sell securities after a corrective period. Traders should look for buying opportunities when 2-period RSI moves below 10, which is considered deeply oversold.
In intraday trading with the ADX (Average Directional Index) indicator, selecting an appropriate time frame is crucial. Shorter time frames, such as 5, 15, or 30 minutes, are commonly used for intraday trading. A shorter time frame helps traders capture quick price movements.
The smoothed moving average is calculated over the number of periods selected, and the average true range is a smoothed average of the true ranges. Then: ADX = 100 times the smoothed moving average of the absolute value of (+DI − -DI) divided by (+DI + -DI)
The ADX line ranges from 0 to 100, with values above 25 typically indicating a strong trend. By analyzing the ADX line, traders can determine whether the trend is strong enough to warrant a swing trade. For instance, if the ADX line is above 25 and rising, it suggests increasing trend strength.
The first ADX value is simply a 14-day average of DX. Subsequent ADX values are smoothed by multiplying the previous 14-day ADX value by 13, adding the most recent DX value and dividing this total by 14.
The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy.
+DI measures the bullish or positive trend, while -DI measures the bearish or negative trend. All these components' values are bound between 0 and 100, acting as an oscillator. The traditional ADX setting is 14, as the lookback period.
The 'ADX One' strategy was launched at the start of 2021 and aims to bring a broader offering of products and services to market, along with state-of-the-art infrastructure in partnership with global market leaders.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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