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

We have backtested a trading strategy based on MACD and ADX indicators, so the trader won’t have to do this: check the backtesting results and learn whether it is possible to lock in profits with this trading plan.

Clarifying MACD and ADX Indicators

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

Moving Average Convergence/Divergence Indicator (MACD)

MACD is used to check the strength of 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.

Average Directional Movement Index (ADX)

The main aim of the average directional index indicator is to measure trendiness. So if you are looking for an indicator to check whether the trend is going up or worn, it is not the proper one – it shows only whether 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 the 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 a 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.

Note:

To check this (or any other) strategy’s performance you can download Download Forex Tester for Free or try Forex Tester Online for Free.

Combining MACD and ADX: A Powerful Trend-Following Strategy

By combining MACD’s ability to spot potential reversals with ADX’s confirmation of trend strength, this strategy aims to filter out false signals and identify high-probability trading opportunities. The following sections will provide step-by-step instructions on how to implement this strategy, along with backtesting results and tips for optimization.

Technical prerequisites

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 rising 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 gives the Buy signal and the 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 gives the Sell signal and the other doesn’t, we should ignore the signal and wait for the two signals to happen in order to get a strong confirmation of the Downtrend.

Optimizing the Strategy: Further Adjustments

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 any 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.

Additional customization

• 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.

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

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

Conclusion

Check the results of the backtesting at the Bull markets. It looks sizable. 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 whether these positive results are 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.

FAQ

Which indicator works best with ADX?

MACD works well with ADX because MACD can detect potential trend reversals while ADX confirms trend strength. This combination allows traders to filter out false signals and identify strong trends.
Additionally, using Bollinger Bands with ADX could provide more precise entry signals. Ultimately, the best indicator combination depends on individual trading style and backtesting results.

How to use MACD with ADX?

Use MACD with ADX by identifying strong trends with ADX above 20. MACD generates signals when it crosses its signal line. Combine these for buy/sell signals: MACD up with +DI above -DI for longs, and MACD down with -DI above +DI for shorts. Backtest these settings to refine your strategy.

What does MACD tell you?

MACD helps identify trend direction and momentum changes. It signals potential reversals through crossovers and divergences with price action. MACD crossovers can serve as buy or sell signals, aiding traders in making informed decisions about when to enter or exit trades. This makes MACD a valuable tool for traders seeking to capitalize on trend shifts.

Is ADX a reliable indicator?

ADX is widely regarded as a reliable indicator for measuring trend strength. It helps traders identify strong trends and avoid weak ones, reducing risk and increasing profit potential by trading in the direction of a strong trend. While it’s a lagging indicator, its ability to quantify trend strength makes it a valuable tool for traders across various markets.