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ADX indicator: everything for calm options trading

ADX indicator: everything for calm options trading

The difficulty of determining the moment of beginning and, more importantly, the end of the trend is often perplexing not only for beginners, but also for professional traders. And this must be done, because trade in the direction on the main movement will always be the most profitable strategy. To solve the problem, developed many technical tools and one of the most complex and widely used binary traders is the ADX indicator or "Medium Direction Strategy".

The description of this trading strategy of binary options was first encountered in the book "New concept in technical trading system" by the famous American trader J. Wells Wilder, who created the RSI and Parabolic SAR, which are so popular on all trading assets and markets.

Calculation and setting of the indicator

The methodology includes two indicators:

  • The direction of the price trend (DMI, Directional Movement Index), which determines the direction of the trend and the points of possible reversal;
  • Average Price Direction ADX (Average Directional Movement Index) showing the strength and dynamics of the price movement.

Graphically ADX is displayed in three charts in a separate window:

  1. The + DI line shows the positive direction (increment) of the price;
  2. Negative (decreasing) in –DI.
  3. ADX is calculated as the ratio of the difference or the sum of + DI / -DI values ​​over a specified number of periods. Thus, the presence of a trend and its dynamics are determined.

Indicator calculation. The algorithm is quite complex and includes such steps as determining the true range (TR, True Range) with which the price changes of +/- DI are compared. Those interested will easily find a detailed description of the calculation on the Internet, and here we draw the reader’s attention to the presence of smoothing the results using the Exponential Moving Average (EMA). Moving Average should be in all the top binary options signals!

By default, the period is set to 14 candles (bars), which works well on most assets and timeframes from H1 and higher. The settings may change depending on the current market, for example, the popular 12.18 and 21-period ADX. 

It is recommended not to go beyond the range of 7-30 periods. As always, the fewer the periods, the more entry points among which there may be false free binary signals, their excessive increase leads to the skipping of a good part of the trend, where there could be several profitable options.

Additionally, you can change the type of price used in the calculations, but as practice has shown, it is better to Close.

ADX for binary options strategy

According to the author, the signals for opening trades are simple: if +DI is higher than-DI and ADX confirms the price increment, turning up, you should open a CALL-option. Accordingly, under the opposite conditions, the market falls and you need to look for opportunities only for PUT-options. With a sideways or falling ADX, there is no directional movement, and we remain out of the market. See examples of signals: