No matter what type of trader you are, trading in the direction of a strong trend increases your potential of profit and reduces risk.
Detecting a strong directional move is a vital skill for any trader.
The ADX (average directional index) is a technical indicator used to determine the strength of the trends in the market.
In this guide, we try to explore how we can use the RSI & ADX trading strategies to make profitable trades.
We also learn about the trading rules and ideal settings to make implementation easier for you in any financial market.
RSI & ADX Strategy – A Complete Guide
The RSI and ADX trading strategy provides a lot of useful information because traders don’t want to be involved in something that is not moving anywhere and not trending strongly.
The ADX indicator trading rules help the trader benefit from the trade strength and get some quick profits.
The best RSI ADX trading strategy can help you trade better and achieve your goals faster.
The RSI (Relative Strength Indicator) is a momentum-based technical indicator used to measure the strength of price movement in a market.
This indicator is plotted as a line that shows values between 0 and 100.
The default lookback period is 14 though you can use any period.
The RSI indicator reading below 30 indicates that the market is oversold while the reading above 70 shows that it is overbought.
A divergence between the price and the RSI shows a trend change.
If the price moves lower and the RSI moves higher, it is a bullish divergence while a bearish divergence occurs when the price moves higher and the RSI moves lower.
The ADX indicator is used to measure the strength of the trend when used with the +DI and –DI values.
When the ADX line is lower than 20, the market is in a consolidation.
If the ADX line crosses higher than 25 and +DI is above –DI, an uptrend is present in the market.
When the –DI is above +DI, it is an indication o a downtrend emerging in the market.
RSI ADX Trading System – What You Should Know?
The best RSI ADX trading system is a universal strategy that helps make profits by using the RSI and ADX trading rules.
Here are the steps to trade with this trading system.
1. Buy only when the ADX indicator is higher than 25.
You should first wait for the indicator to show a reading higher than 25 before seeing whether the market is going up or down.
A value of 25 or higher suggests a strong trend developing.
To determine the direction of the trend, you can look at the actual price action.
2. Sell when the RSI indicator drops below 30.
Your RSI indicator helps you identify the entry signal because it is based on the same settings.
A reading lower than 30 suggests that the market is oversold and reversing.
So you should sell when the RSI indicator starts dropping.
3. Place protective stop loss at the last high ADX.
ADX last high can help you find the right stop-loss point using this strategy.
Once you know where the indicator had its last high, you can find the corresponding value on the price chart to get your stop loss level.
4. Take profits when the indicator breaks below 25.
The RSI ADX strategy works if you can capture profits from the resulting trend. When a trend starts fading away, you take your profits.
To use the ADX indicator to your advantage, take profits when the indicator suggests a breakout by going lower to 25.
ADX Trading Rules – Getting Started
The first ADX trading rule suggests that a reading below 25 is a sign of a non-trading market.
The second rule says that ADX above 25 signals the presence of a strong bearish/bullish trend.
According to these rules, you should wait for the indicator to go above 25 before determining whether the market goes up or down.
To determine the direction of the trend, use the last 50 candlesticks as a sample size.
If the price heads lower during these sticks, it suggests a bearish trend.
So you should take profits when the indicator breaks below 25.
Such a reading indicates that the existing trend is running out of strength.
ADX Settings For Day Trading
The ADX indicator calculates on the basis of moving average of price over a given time frame.
The best indicator settings for day trading comprise 14 periods to get accurate signals that help you get in the trade on time.
ADX is plotted as a non-directional single line with values in the range 0 to 100.
The ADX is usually plotted in the window in which the DI lines are plotted.
ADX quantifies the strength of a trend by rising upward or downward.
When the +DI is higher than –DI, prices move up and the ADX value suggests an uptrend and its strength.
It shows the strength of the downtrend when the –DI is above the +DI.
ADX & MACD Trading Strategy
The ADX-MACD trading strategy is based on using two efficient indicators – the Average Directional Index (ADX) and the Moving Average Convergence Divergence (MACD).
The MACD indicator is based on the difference between two exponential moving averages to find the direction of the trend and its momentum.
As a combination, ADX shows whether the trend is going strong or fading and MACD detects the trend reversals.
The two technical indicators can be used in a number of combinations to get the best results. Here is the ideal setup.
Buy Entry Rules
- MACD trading above zero
- +Di signal line crosses higher than the D- line
- ADX line is higher than 20 and rises upwards
- Make a buy where the three conditions meet on the candlestick
Sell Entry Rules
- MACD trading below zero
- D- line crosses higher than D+ line
- ADX line rises above 20
- Open a short trade where these conditions meet
The RSI & ADX strategy helps identify the strongest trends to trade and gives an edge to the traders.
The biggest profits are achieved by trading the strongest trends.
This system also identifies the range conditions so that a trader does not get stuck.
It also shows when the price breaks out of range and alerts of changes in the trend momentum.