Forex Swing Trading Strategy #7:(ADX Swing Trading Strategy)
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Home Previous Next Lesson. Yet again we have managed to talk a top trader into providing a trading lessons for our subscribers. Chuck LeBeau is not only a great trader, he is adx rsi trading strategy recognized authority on trading systems. Now that I am spending seven hours a day doing trading for the new hedge fund I haven't had much time for research or writing new Bulletins. However a comment in one of the trading newsgroups that I monitor got me thinking about the potential benefits of combining our knowledge of RSI and ADX into a simple system.
Both the ADX adx rsi trading strategy RSI are valuable trading tools and a combination of the two would adx rsi trading strategy to offer some interesting possibilities. I like to use the RSI primarily as an indicator for buying on dips in an uptrend.
The ADX is my primary indicator of trend strength. Here are a few ideas on how the two indicators might compliment each other in a system that "knows" when to enter on strength and when to buys on dips. I'm only going to use the long side for examples but the logic should apply to short trades as well. When the ADX is rising it usually indicates that a strong trend is underway. In many cases waiting for any sizeable dip would be costly because the market could run away and the dip entry would be too late to maximize our profits.
In this case we must enter on strength. To make this idea into a simple trading rule we might state that if the ADX is rising and we have some indication it is rising because an uptrend is underway we will adx rsi trading strategy whenever the RSI is below some very high threshold like This rule would give us a very prompt entry in most cases and the result would be almost identical to simply trading whenever the ADX is rising which seems to be a good idea.
The RSI has little, if any, benefit in this situation except it might occasionally keep us from buying into an extremely overbought market where the RSI was above In this case a slight delay on the entry might be prudent. In this case the rule would be that when the ADX is not rising we should postpone our entry until the RSI is below some more typical threshold like 45 or Since the ADX is not giving us a signal that the trend is unusually strong we would need some additional indicator to show that the market has some minimal amount of upward direction.
Otherwise we would not be buying a dip within adx rsi trading strategy framework of an uptrend. Something simple like an upward sloping bar moving average might work in this application.
When a market is rising but the trend is not particularly strong any spike in the RSI represents a good opportunity to take a profit. For example when trading in stocks the 9-bar RSI rising above 75 or 80 often signals that a correction is imminent. If the market trend is not unusually strong we would probably be happy with taking our profit on strength rather than waiting to adx rsi trading strategy stopped out on weakness.
However if the ADX is rising we might want to risk a correction in hopes of riding the trend even further. However, once our patience has allowed us to accumulate a very substantial adx rsi trading strategy profit we might be best served by acting on the next RSI signal and nailing down the big winner.
We would be in and out of our trades almost immediately. Therefore we need to ignore the RSI extremes until our profit has had a chance to accumulate. In summary, the important concept to remember is that our knowledge of the ADX can make the RSI a much more useful trading tool.
When the ADX is rising the RSI tends to adx rsi trading strategy overbought and it can often remain overbought for a surprising length of time. On the other hand when the ADX is flat or declining any spike to the upside in the Adx rsi trading strategy is an opportunity to nail down a profit. Conversely, any spike to the downside can be a potentially profitable entry point. Here is the logic of a simple little system based on this discussion. Just the rules in text form, you will have to do your adx rsi trading strategy coding.
The parameters selected have not been tested or optimized. For example the day moving average is just a number I picked out of the air. This is enough information to get you started and you can vary the rules to make the system trade over whatever time frame you prefer.
Here is where you can influence the frequency of trading. For more trades use a higher threshold like For fewer trades use a lower threshold like Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.
The bar moving average must be rising. You need some additional exit rule for the losing trades. Use your favorite loss-limiting exit or you might want to exit when the price goes below the dat moving average or when the day moving average turns down.
See entry rule 1.