ADX and Stochastic Strategy – Get in on Strong Trends and Stay Out in Sideway Market
In this strategy article, we will cover the trading rules and trading setup for the ADX and Stochastic Strategy. The ADX or Average Directional Movement Index oscillator is a relatively simple yet powerful trading indicator which is used to determine the trend and the trend strength. There are many trading strategies involving the ADX oscillator but combining it with the Stochastic oscillator makes for a really easy to trade set up.
The ADX and Stochastic strategy allows traders to enter into a strong trend (uptrend or downtrend) and keeps traders out of the markets when the markets are ranging. For trend following traders, the ADX and Stochastic strategy can be fun to trade with if not simple. This also makes it easy even for complete beginners to Forex to simply follow the buy and sell signal rules outlined in this article to get started.
ADX and Stochastic Strategy
The ADX oscillator is set up to 20 periods and the main ADX line is not required. In the ADX and Stochastic strategy, we only make use of the DI+ and DI- lines, which signal uptrend when the DI+ crosses and stays above DI- and a downtrend is signaled when DI+ crosses and stays below DI-.
The Stochastic oscillator is set to 5, 3,3, High/Low exponential settings with the oscillator levels set to 70 and 30 as the overbought and oversold level and works as a trigger for the buy/sell signals from this trading strategy.
The first chart below illustrates the ADX and Stochastic indicators applied to the chart.
ADX and Stochastic Strategy – Chart Set up
ADX and Stochastic Strategy – Buy/Sell Signals
- Stochastic must first crossover from below 30
- The ADX Indicator should then follow up with the DI+ crossing over DI- and staying above DI-
- Buy on the closing price of the candlestick with stops at the nearest low
- Exit the long position when the Stochastic oscillator crosses down from above 70 and DI+ dips back below 25
- Stochastic must first crossover from above 70
- The ADX indicator should then follow up with DI- crossover above DI+ and staying above DI+
- Sell on the closing price of the candle with stops set to the nearest low
- Exit the short position when the Stochastics oscillator crosses back above from below 30 and DI- dips back below 25
ADX and Stochastic Strategy – Buy/Sell Examples
ADX and Stochastic Strategy – Buy Setup
In the above buy signal example, the Stochastic first alerts us to a buy set up by crossing above from below 30. The ADX indicator then follows up by the DI+ rising above DI-. Long positions are entered on the closing price of the candlestick with the stops set to the nearest low. The long position is held on until the Stochastic drops back below 70 and the DI+ is also below its 25 level.
ADX and Stochastics Strategy – Sell Setup
In the above sell set up example, we have the Stochastic oscillator crossing the 70 level from above. A few sessions later, the ADX signaled a sell with the DI- rising above DI+. Short positions are entered at the closing price with stops set to the nearest high. The short position is held on until the Stochastic dips back from above 70 with the DI- staying below the 25 level.
ADX and Stochastic Strategy – Final Notes
This trading strategy is rather simple and can be used by beginners as well. The trades tend to perform well during periods of strongly trending markets and therefore care should be taken when prices are moving sideways and are not making consecutive highs or lows. However, the relatively risk/reward set up with most of the signals from the ADX and Stochastic strategy makes it for a profitable trading system worth exploring.
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