MACD+ADX trading strategy: how two perfect trading tools will pass the test

A Couple of Words About Indicators

We depicted these indicators in details in the previous articles, so let us remind in brief their functions and possible readings.

MACD (Moving Average Convergence/Divergence Indicator) is used to check the strength the trend, the possible direction of the trend and the possible reversal points. The default settings of this indicator are 12, 26, 9. MACD is adored by many traders and thus a broadly-used indicator for its simplicity and clear signals of the trades’ entry points.

The main aim of the ADX indicator is to measure trendiness. So if you are looking for an indicator to check either the trend is going up or worn, it is not the proper one – it shows only either the trend is strong or the market is consolidating.

The trend is strong and is not going to fade if the indicator reaches above the 25 line. On contrary, if the indicator reaches below the 25 line, then the trend is weak or the market is not trending, so it is better not to enter trades during such period.

The ADX signals over 30 demonstrate the strong trend to happen – it is definitely the best time to get into the trade.

Some traders prefer to make the use of all three lines of the indicator: ADX itself, +Di and –Di lines – they perceive the cross of these lines as the additional signal of the trend’s fading and reversal coming. And this exact interpretation of the ADX indicator we are going to use while backtesting this particular strategy.

So MACD is going to detect the trend reversals, while the ADX is showing either the trend is strong or fading. Sounds like a nice combo.

Technical Information

Timeframe: 15 mins and above (we backtest within the 30 mins timeframe).

Currency pair: Any.

Indicators: MACD (default settings 12, 26, 9), ADX (with default settings).

Stop Loss/Take Profit: set the SL/TP over/below the closest swing high/low.

Buy Entry Rules:

• MACD Slopes are raising over the zero line.
• To confirm the signal D+ line of the ADX indicator crosses the D- line.
• ADX line is rising upwards too.
• On the candlestick where these two conditions are met, you open the Long trade.
• In the case, one of the indicators give the Buy signal and other doesn’t, we should ignore the signal and wait for the two signals to happen in order to get the strong confirmation of the Uptrend.

Sell Entry Rules:

• MACD Slopes are falling below the zero line.
• To confirm the signal D- line of the ADX indicator crosses the D+ line and is placed above it.
• ADX line is rising upwards.
• On the candlestick where these two conditions are met, you open the Short trade.
• In the case, one of the indicators give the Sell signal and other doesn’t, we should ignore the signal and wait for the two signals to happen in order to get the strong confirmation of the Downtrend.

Backtesting Results

Trades|Period*

*How long it took us to enter the 50 trades for the Training Set and 20 trades for the Forward Testing.

A Reminder: in order to save your valuable time and efforts, we have introduced the system of backtesting when you perform only 50 trades through 3 different types of market (Bullish, Bearish and Flat markets) and then again 20 trades through the given types of market, but during other periods. Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy.

The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here.

Conclusions

Check the results of the backtesting at the Bull markets. It looks sizeable. However, it took almost two months to earn this amount.

We are happy to observe that among all the backtesting experiments it is the first trading strategy that revealed the positive results only.

It took us a bit longer to perform 50/20 trades during the Flat markets, probably because it is a trend-catching strategy. However, the results are still satisfying.

Among all the strategies we have backtested, it would be great to check either these positive results going to multiply or decrease with various settings as listed below in the section “Further adjustments”.

Over and over we get the proves that even the most promising ideas should be backtested first before taking them out to the live trading.

How Else You Can Adjust the Strategy

There are several ways to read ADX indicator, the author of the method indicates that if the ADX crosses the 20 level – then the trend is getting stronger, if the ADX is over 30 – the trend has gained even more power.

We have mentioned it here before, but it is great to remind how else you can read the ADX indicator’s signals:

• Some propose to get into the trade when the ADX is below the 20 line, so it gives the possibility to catch the growing trend and not to miss the beginning of it. The basic idea is that the more mature trend is the more possible is the reversal;
• Other traders make the use of all three lines of the indicator: ADX itself, +Di and –Di lines – they perceive the cross of these lines as the additional signal of the (), while there are some traders who propose to ignore those lines and trade ADX directly (as we did in the described strategy);
• In addition, we should mention several opinions that not the cross of the 20 line is that important as the slopes of the indicator and its direction.

We cannot claim anything of these being false or true, as obviously every trader finds its own way to read popular indicators and adjust them according to their trading needs. Again, the best way to find out – to backtest any of these settings and pick the one that will work the best for you.

What else can be adjusted additionally?

• The meaning of the Take Profit and Stop Loss – traditionally we mention this in every article, but it doesn’t lose the common sense – try to set the same meanings, 1:2 or 1:3 ratio, put it manually above/beyond the nearest swing – any of your SL/TP management can possibly influence the result of the trade;
• Timeframe – usually we list all the possible timeframes you can trade the strategy within, and we backtest one of them – it is up to you to try various timeframes;
• The ADX and MACD combo might not bring the expected results – you can try to combine ADX with Bollinger Bands in order to get more precise signals for the trade entries.

Try It Yourself

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.

The testing of this strategy was arranged in Forex Tester with the historical data that comes along with the program.

To check this (or any other) strategy’s performance you can download Forex Tester for free. In addition, you will receive 22 years of free historical data (easily downloadable straight from the software).

Do you use ADX indicator as your trading tool? What about MACD? Is there a favorite one among these two? Have you ever tried to trade using MACD and/or ADX and what were the results?