ADX is one of the best tools in forex, when it comes to identify trend and its momentum. If offers all in one solution that can be applied in swing trading systems very well.
This forex strategy uses breakout of bollinger bands as entry signal. Entry signal is confirmed by ADX indicator. This way we only trade in the direction of main trend. Theshold momentum is also necessary for us to consider signal to be valid.
Strategy is suitable for conservative day traders that are patient enough to stay in position for up to couple of days.
Used forex indicators
ADX (average directional movement index) period 40. Apply additional 10 line (yellow). Additional line will be used as threshold for momentum. We will only take traders when momentum rises above 10 line (main blue line). Position of +DI (green) and –DI (red) will identify trend, while crossing of those two lines will signalize position entry due to the trend weakness. ADX will also determine suitable price for position liquidation in profit.
Bollinger bands (default settings). BB are extremely useful when it comes to drawing a price tunnel based on volatility. Valid breakout in the direction of trend is extremely reliable entry signal.
Forex strategy rules
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BUY:
To enter the buy trade, or even to consider a signal, two trend related conditions must be met.
Main ADX line trending above horizontal yellow line. Momentum of trend is sufficient.
Green ADX line trending above red ADX line. Uptrend is in progress. We will enter only long trades.
Signal:
Candle breakout. Clearly bullish candle closing above upper BB band. We enter the trade long on candle close. Stop loss is placed below the low reached just before the signal (previous swing low).
Take profit:
Green ADX crossing red ADX downwards.
Main ADX line falling below 10 value (yellow horizontal line)
SELL:
To enter the sell trade, or even to consider a signal, two trend related conditions must be met.
Main ADX line trending above horizontal yellow line. Momentum of trend is sufficient.
Green ADX line trending below red ADX line. Downtrend is in progress. We will enter only long trades.
Signal:
Candle breakout. Clearly bearish candle closing below bottom BB band. We enter the trade short on candle close. Stop loss is placed above the high reached just before the signal (previous swing high).
Take profit:
Green ADX crossing red ADX upwards.
Main ADX line falling below 10 value (yellow horizontal line)
