ADX indicator: everything for calm options trading
- VFX Blog
- Strategies
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:
- The + DI line shows the positive direction (increment) of the price;
- Negative (decreasing) in –DI.
- 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:
Additionally, the trend strength can be determined using absolute ADX values. If it declines, below the level of 20, the trend is weak, if above or close to 40, the movement is likely to continue. Here you can draw analogies with overbought/oversold oscillators - their application differs, but in general, the pivot points are determined correctly.
Advantages, disadvantages, recommendations for use...
- When crossing, you must wait for the current candle to close, especially if there is a negative price level nearby: support/resistance, Fibonacci, Pivot, etc. A rebound is possible, and then the ADX signal is canceled. We set the expiration for at least 2-3 candles of the working timeframe, for H1 we increase the period to 5-7 bars. Forex traders can use a version of the indicator with an alert, on binary trading platform everything is controlled manually.
- Always remember how any trading strategy should work, namely: you cannot open a deal using only one indicator, we are looking for additional confirmation. Moreover, you don't need a lot of them, just 1-2 two of trend lines, oscillators or even simple trend lines as shown image.
- Divergences (divergences) of the movement of the price chart and DI lines occur periodically. For example, there is a new local maximum on the chart, and it is less than the previous one by +DI. How to use divergences - they most often show not the beginning, but the end of the trend and the close reversal. If there is an opportunity to close the option ahead of schedule, it is better to do it. It is very difficult to see the difference at the very beginning!
- The next real binary options signals that require special attention will be several high or low peaks of ADX line. From the point of view of the market situation, this means that buyers or sellers are trying to turn the situation in their favor and this can be seen on the chart by sharp price impulses with large volumes of transactions. The upper peaks indicate the continuation of the trend and "repulse of the attack", the lower ones indicate the weakening of the movement and beginning of profit-fixed.
ADX, falls into the category of highly delay indicators. If you analyze the parameters in detail, you can see that in the process of calculation, the data twice smooth the moving average. Yes, this removes most of the market "noise" but at the same time reduces sensitivity on the lower timeframes and needs to move to H1 and above to bring the percentage of profitable signals to the desired binary options 65-75%.
- The delay is especially strong when exiting a long flat, when at least 10-15% of the trend has already passed before the beginning of the crossing of the +/- DI lines. Here, more than ever, additional confirmation from channel indicators and data from the dynamics of increase/decrease in volumes is important.
Summarize. The ADX indicator is recommended for traders who prefer medium - and long-term options. It does not always respond adequately to sharp market changes, take this into account in the analysis of how signals work for binary options.
Although the example above shows short-term deals on the M15 do not appear very often and beginners should enter the market only after a flat (period) consolidation - you need to make sure that the sideways movement by channel indicators ends, then the chances of profit increase significantly.