Two-Period ADX Trading Strategy

With this strategy, you are using a 2-period ADX to catch low-risk entries in a trending market.

Rules for going long (buying)

  1. From below the 20-period EMA, the price makes a higher swing high above the 20-period EMA.
  2. The 2-period ADX falls below 25, but price is still above the EMA (signal bar).
  3. Place a buy order one tick above the high of the signal bar.
  4. Cancel order if not triggered by the next bar.

Rules for going short (selling)

  1. From above the 20-period EMA, the price makes a lower swing low below the 20-period EMA.
  2. The 2-period ADX falls below 25, but price is still below the EMA (signal bar).
  3. Place a sell order one tick below the low of the signal bar.
  4. Cancel order if not triggered by the next bar.

Example

Let's look at an example. Looking at the chart, we have 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 the swing high. That was our signal that a bull trend has begun.

After rising for several bars, price started to pull back. 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 when price broke above the high of the signal bar. We place the stop-loss just below the signal bar. The risk is small and even with a conservative target price, we could obtain a high risk to reward ratio. In addition, this strategy offered a second low-risk entry into this bull trend.

If you want to ask questions or offer your suggestions regarding the two-period ADX trading strategy, please do so on Forex forum.


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