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You are here: Home / Trading Setups / 2-Period ADX Trend Trading Strategy

2-Period ADX Trend Trading Strategy

By Galen Woods in Trading Setups on March 6, 2014

J. Welles Wilder pioneered an array of popular indicators (ADX, Parabolic SAR, RSI) in his book, New Concepts in Technical Trading Systems. The 2-period ADX is our tweak of Wilder’s ADX indicator to enhance its prowess for day traders. In the 2-period ADX Trend Trading Strategy, we are using a 2-period ADX to catch low risk entries in a trending market.

The concept underlying the 2-period ADX is to find the perfect pause in the market. By using such a short look-back period for the ADX indicator, it becomes extremely sensitive. Hence, it rarely falls below 25. When it does, it is a signal that a break-out is imminent.

Learn: The Logic Of The 2-Period ADX

In this trading strategy, we will analyze the trend context to anticipate the break-out direction.

Trading Rules – 2-Period ADX Trend Trading

Bull Trends

  1. From below the 20-period EMA, price makes a higher swing high above the 20-period EMA.
  2. 2-period ADX falls below 25 but price is still above EMA. (signal bar)
  3. Place buy order one tick above the high of the signal bar.
  4. Cancel order if not triggered by the next bar.

Bear Trends

  1. From above the 20-period EMA, price makes a lower swing low below the 20-period EMA.
  2. 2-period ADX falls below 25 but price is still below EMA. (signal bar)
  3. Place sell order one tick below the low of the signal bar.
  4. Cancel order if not triggered by the next bar.

2-Period ADX Trend Trading Examples

Winning Trade – Bullish Entry

2-Period ADX Trend Trading Strategy Winning Trade
This is a 5-minute ES chart showing a nice bullish trending session. The purple line is the 20-period EMA, and the lower panel shows the 2-period ADX.

  1. From below the moving average, price rose and broke above a swing high. That was our signal that a bull trend has begun.
  2. After rising for several bars, price started to pullback. The pullback consisted of many narrow range bars which stayed above the EMA. The bullishness remained intact.
  3. The 2-period ADX fell below 25. We bought as price broke above the high of the signal bar.

By placing our stop just below the low of the signal bar, our risk was small. Even with a conservative target price, we could obtain a high reward to risk ratio.

In addition, the 2-period ADX offered a second entry in the later part of the session. That entry was another low-risk entry into the bull trend.

Losing Trade – Bearish Entry

2-Period ADX Trend Trading Strategy Losing Trade
This is another 5-minute chart of ES futures. In this case, the first signal resulted in a loss.

  1. Price fell below the EMA and broke a swing low, giving us the signal to look for shorts.
  2. After pushing below the support, the bearish momentum waned. The bearish candlesticks had small bodies. Eventually, a strong bullish bar ended the fall. However, the bullish bar had no follow-through. Instead, price drifted horizontally along the earlier support which has flipped to become a resistance.
  3. In the sideways trading range, we had two 2-period ADX signals. The first signal failed almost immediately.

However, the trade risk was low. Hence, the potential profits from the second ADX signal more than made up for it.

Review – 2-Period ADX Trend Trading Strategy

The 2-period ADX is an excellent way to find low-risk entries into market trends. Most signal bars are narrow range bars, and its extreme offers a reliable stop-loss level.

The main drawback of the 2-period ADX is that we might get caught in tight trading ranges. However, by combining the 2-period ADX signal with the market bias we identified with price action, we limit our entries to potential new trends. Not only does this method keep us with the trend, it also helps us to avoid false break-outs.

Another characteristic of the 2-period ADX signals is that they occur infrequently. It teaches the virtue of patience in trading. Instead of jumping into a trend as it’s speeding away, exercise patience and join the train during its perfect pause.

Feel free to use your own trend filters instead of what we suggested. The key is to find potential new trends. The signals do not work as well in mature trends.

Read more about ADX, Trading Trend

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2-Period ADX Trend Trading Strategy

Comments

  1. Peter Walkley says

    December 17, 2014 at 12:49 AM

    Is there a typo in step 3 of dealing with Bear trends. Should it not be “Place SELL order one tick below the low of the signal bar.” ?

    Reply
    • Galen Woods says

      December 17, 2014 at 9:58 AM

      Yes, it’s a typo. I’ve corrected it. Thanks Peter!

      Reply
  2. cryptogoktsu says

    May 22, 2015 at 7:49 AM

    Which time do you recommend for this set up? I noticed that By placing our stop just below the low of the signal bar on a 5minute chart , the stop was too tight and several trades hit the stop loss within a few minute. Also what ADX period to use 14. 25, 50?

    Reply
    • Galen Woods says

      May 27, 2015 at 11:22 AM

      I’ve used this setup mainly for day trading. This strategy is by no means a profitable setup when traded mechanically. It merely offers a context to discuss the 2-Period ADX as a trading tool. – ADX(2)

      For most of my setup discussions, I use a generic stop placement (at the end of the setup bar) for consistency. The stop placement can clearly be improved on depending on the volatility of your instrument and your targeting methods.

      Reply
  3. turki alqhtani says

    February 12, 2017 at 10:03 AM

    ممتاز

    Reply
    • Galen Woods says

      February 13, 2017 at 1:42 PM

      Thanks for the comment. Glad you like it!

      Reply
  4. Connor says

    January 7, 2018 at 9:33 PM

    Really great article.
    Can I ask the settings for ADX for daily? I have DI Period 14 Smooth 14 with ADXR 10 although not sure what the last one does.
    And ADX 5 mins DIP 5 Smooth 14?
    Thanks.
    Connor

    Reply
    • Galen Woods says

      January 10, 2018 at 9:43 AM

      Hi Connor, for this setup, use the ADX indicator and not the ADXR (which measures the momentum of ADX). For the ADX, set the lookback period to 2. (The default is usually 14.)

      Reply
  5. João da Silva says

    November 26, 2018 at 4:54 AM

    Thanks for sharing,
    but I didn’t understand when to exit the trade (take profit).

    Reply
    • Galen Woods says

      November 26, 2018 at 9:38 AM

      Hi! There are many ways to take profit and the basic method is to aim for the nearest support or resistance level. You can check out 10 different ways to take profit here.

      Reply
  6. Rob says

    February 27, 2019 at 3:14 AM

    This is an amazing strategy! I ran through a sample size using this strategy, and I’ve been able to make some of the best, low-risk trades that I’ve ever had. Best of all, I was able to identify the moves before they happened, which is almost like having a crystal ball. By far, this is the most amazing strategy that I’ve come across. What’s even better, is that I’ve configured my charting software (TC2000) to alert me on specific stocks that I’m monitoring when the 2-period ADX dips below 25 on both the 2-minute and 5-minute time frames. Now, all I do is just review the alerts when they come in and focus on the ones that have good chart context for very easy trend trades. Here are a couple of charts for others to see the potential of this awesome strategy:

    ROKU – 2/25/19 – https://prnt.sc/mqhx3q
    DIS – 2/25/19 – https://prnt.sc/mqhxea

    I can’t thank you enough! You are awesome!!!

    Reply
    • Rob says

      March 1, 2019 at 7:26 AM

      One quick note… when you’re looking at the chart in real-time, there can be some false-positives. To filter out the false-positives, I like to add some extra buffer.

      For example, if I’m waiting for the 2-period ADX to dip below 25, I like to add some extra buffer, meaning that I wait for it to dip below 20.

      Reply
      • Galen Woods says

        March 3, 2019 at 9:56 AM

        Great to hear! I really appreciate you sharing your experience with this strategy here. And complete with charts. Fantastic work!

        Reply
  7. Ryan says

    November 18, 2020 at 12:34 AM

    This is really good one. However, I am always getting false positive result for bullish trend, I am running it on crypto with 3m chart and ADX with smoothing period 2 and DI length 2. Is this setup correct or am I doing something wrong here?

    Reply
    • Galen Woods says

      November 19, 2020 at 11:04 AM

      Hi Ryan, perhaps you can explore ways to filter the setup. I find that It’s best to set an alert for the pattern but zoom in manually to examine the price action to find the best setups, instead of trading it mechanically.

      Reply
  8. GANESH MANKAR says

    June 10, 2021 at 1:22 AM

    HI
    PLEASE CORRECT ME IF I AM WRONG
    IN THE BULL TREND
    1. CANDLE IS FORMED ABOVE 20 PERIOD EMA,
    AND FOR BEAR TREND
    1. CANDLE IS FORMED BELOW 20 PERIOD EMA,

    Reply
    • Galen Woods says

      June 11, 2021 at 11:27 AM

      Hi Ganesh, to clarify how we identify a bull trend in the discussion above, first we mark a swing high above the EMA, and once the market breaks above the swing high, we deem it as a higher swing high and adopt a bullish bias.

      Reply
  9. Satish says

    December 17, 2021 at 9:38 PM

    There are 2 setting in adx on trading view.
    1 is ADX smoothing and ADX length both comes in 14 in default. So which 1 I have to change. .?

    Reply
    • Galen Woods says

      December 22, 2021 at 12:19 PM

      Hi Satish, please change both settings.

      Reply

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