We have tried MACD in different combinations and the same for ADX. Let’s check how these two indicators work together. What are the best settings for those two widely-used indicators in order to highlight their best sides?
We can learn only while backtesting them through different markets and parameters.
Keep reading and learn the results below.
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.
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:
Sell Entry Rules:
|Market||Training set||Forward testing|
|Bull||589,45 pips||390,55 pips|
|Bear||53,39 pips||12,67 pips|
|Flat||126,7 pips||185 pips|
|Market||Training set||Forward testing|
|Bull||01/03/2011-22/04/2011||09/06/2010 – 02/07/2010|
|Flat||01/09/2016 – 26/10/2016||04/05/2015 – 21/05/2015|
*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.
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.
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:
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?
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 21 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?