ADX Ichimoku Strategy – Understand Trend Strength for Improved Results 

 December 23, 2015

By  Advanced Strategies

Combining ADX Indicator with the Ichimoku Indicator for what we call the ADX Ichimoku Strategy can improve your trading consistency. Traders familiar with the Ichimoku trading indicator will know that it is a complete trading system in itself. The Ichimoku trading system can be used as a reliable way to enter into the long term trends in the market. The most notable part of the Ichimoku system is the cloud itself which is used as a dynamic support and resistance zone. By isolating just the Ichimoku cloud and applying the ADX or average directional movement index, traders can better make use of the trend strength determined by the ADX indicator.

When combining the trend strength with the price action in relation to the Ichimoku cloud, traders would be able to find a good entry point into a potential unfolding of a strong momentum in the prevailing trend.

Ichimoku and ADX Chart Set up

We make use of the Ichimoku indicator with the default settings of 9, 26, 52 and only make use of the Cloud. The remaining components of the Ichimoku trading system are hidden.

The ADX indicator is set to 20 periods with the ADX line hidden out. Once applied, the charts look as the picture shown below.

ADX Ichimoku strategy - setup

ADX Ichimoku Strategy – Chart Setup

In the above chart, what we have is price and its relation to the cloud and the ADX indicator determining the strength of the trend.

ADX Ichimoku Strategy- Buy/Sell Signals

[sociallocker id=”5732″]Buy Signals:

  1. Price must have recently broken above the Ichimoku cloud
  2. Wait for a pullback to the cloud with the ADX indicator signaling the uptrend strength with DI+ cutting above DI-
  3. Buy on the candle close with stops set to the nearest or recent low
  4. The most ideal set up is where support is established on the cloud and DI+ rises above DI-
  5. Take a 1:2 or 1:3 risk reward set up and trail the remainder of the open position until DI+ crosses back below DI-

Sell Signals:

  1. Price must have recently broken down below the Ichimoku cloud
  2. Wait for a pullback and watch the ADX indicator for DI- to cut above DI+
  3. Sell on the candle close with stops set to the nearest or recent high
  4. The most ideal trade set up is where price breaks below the Ichimoku cloud and pulls back to the cloud to form resistance which is where the DI- rises above DI+ signaling the downtrend strength
  5. Exit position at 1:2 or 1:3 risk/reward or wait for the ADX to signal exhaustion with DI- going back below DI+ and exit.[/sociallocker]

ADX Ichimoku Strategy – Trade Examples

Buy Signal Example

ADX Ichimoku - Buy SignalADX Ichimoku – Buy Signal Example

In the buy signal shown above, using the Ichimoku and ADX trading system, the point 1 marks the initial breakout to the upside with prices settling above the cloud. We now wait for a pullback to the cloud while watching the ADX’s DI+ crossing DI- to the upside, which occurs at point 3. Long position is taken on the candle close with stops set to the recent low. The long position is closed when DI+ crosses below DI-.

Sell Signal Example

ADX Ichimoku - Sell SignalADX Ichimoku – Sell Signal Example

In the sell signal set up shown above, prices first break below the cloud before pulling back. Here, at point 3, DI- rises above DI+ indicating a short position, which is closed out after DI- falls back below DI+, resulting in a quick profit.

ADX Ichimoku Strategy – Works Best on 4H Charts or Longer…

The Ichimoku and ADX trading system set up is relatively easy to trade. It works best on the 4-hour char time frame and requires a bit of patience to wait for the ADX to signal the entry on the pullback. Both beginners and professional traders will find it easy to trade this simple trading strategy.

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