The ADX indicator by J. Welles Wilder is a wildly popular indicator.
Many trading strategies like Linda Raschke’s Holy Grail and Jeff Cooper’s 5 Day Momentum Method use the ADX indicator to identify strong trends. However, day trading with the ADX indicator is not common.
The reason is while the ADX indicator is good at identifying strong trends, it is a lagging indicator. Lagging indicators might work for position trading, but are not acceptable in day trading.
In that case, is day trading with the ADX indicator possible?
Yes, if you are willing to give my 2-period ADX day trading strategy a try.
2-period ADX Indicator For Day Trading
For technical indicators, the shorter the period, the more sensitive it is to price action.
Hence, a 2-period ADX indicator is acutely sensitive to price movements. It responds quickly, but erratically.
Look at the 2-period ADX indicator on the 5-minute ES chart below. You will notice that it goes above 75 a lot more often than dropping below 25.
This phenomenon makes sense. Recall that the ADX indicator measures the strength of trends. ADX values above 75 mean extreme trendiness and values below 25 represent a lack of trend strength.
A 2-period ADX indicator is very sensitive. Thus, it detects small and fleeting trends and rises above 75 easily. These short-lived trends are common but not profitable for trading.
On the other hand, it takes lots of inaction for the ultra sensitive 2-period ADX indicator to drop below 25.
When it does drop below 25, it has found the rare eye of the storm, the absolute calmness before a significant breakout.
Trade Breakouts With ADX Indicator
When day trading with the ADX indicator, we focus on the 2-period ADX falling below 25.
When that happens, we prepare ourselves for trading break-outs into potent new trends.
In this trading session, the 2-period ADX indicator fell below 25 to indicate the perfect pause.
Use bracket orders that include a buy stop order above the signal bar and a sell stop order below it. Once one of the stop order is triggered, the other one will be canceled.
As you can see from the candlestick chart above, the price fell below the signal bar and triggered the sell order. It gave us a solid day trade that captured most of the day’s range.
If the price action context is not trending, you might want to consider taking small profits instead of letting profits run.
Day Trading With ADX Indicator Is Possible (And Profitable)
In essence, the 2-period ADX indicator is a powerful tool to find high probability break-out trades.
The 2-period ADX indicator searches for the ideal low-risk entry point for day trading strategies.
It is a simple tool that you can easily integrate with your day trading setups.
Add it into your day trading strategy as a timing device, or use it as a scalping trade setup. You will be pleasantly surprised.
Learn: Trend Trading Strategy Using The 2-Period ADX Indicator
Read: The Secret To Using ADX Indicator
If you like the idea of using fast indicators, you will love the 2-period RSI.
Total Spread Betting says
July 29, 2015 at 1:49 PMI trade using ADX and DMi almost as a complete strategy. I have never used such a short period for the ADX but I am just adding it to some charts now and I can see this looks like it would work really well to confirm entry points. I am also going to look at the high values to see if this gives an indication of the end of the trend. Thanks for sharing the arricle!!!
Galen Woods says
July 30, 2015 at 9:52 AMHi, thanks for the comment. Looking at high values to exit the trade is a good approach for scalping, but tends to cut the profit short.
pete says
March 5, 2016 at 3:47 PMIs the 2 period ADX better than the 2 Period RSI? When you suggest to close the trade? Can the rsi2 or adx2 may be used to trade both futures abd equity?
thankd
Galen Woods says
March 8, 2016 at 8:09 AMYou can use them on both futures and equity. But of course, it depends on your overall trading approach. You can refer to this for ideas on how to close a trade.
GBN says
October 9, 2017 at 5:20 PMHi Galen
I read this strategy with great interest and checked on my crude oil chart (in india). looks promising. however, there are times when the 2 period ADX remains below 25 for sometime before rising above 25.. so wondering if the trade entry should be taken once it goes below 25 or goes above 25?
Another thing is sometimes i get a false trade, which means, after touching 25 and reversing, the trade does not last long. any filter mechanism you can suggest?
many thanks
Galen Woods says
October 13, 2017 at 11:19 AMIt’s best to use the ADX dipping below 25 as a signal to consider a breakout trade. The breakout trade should be based on a price pattern, like an inside bar or a congestion area. In this sense, you are not trading the indicator, but the underlying price pattern. You can try to stick with the trend for the breakout direction. A way to get a better R:R is also to fade a breakout against the trend.
Jinen Shah says
January 11, 2018 at 3:57 PMwould you please suggest whether to use adx on the time frame on which the trade is taken or on the carts that you are actually analysing the trend… To explain further I generally use the daily chart or weekly chart to analyse the trend and take the trade based on 4 hourly chart (swing trade). Similarly i analyse the daily and 1 hour chart for trend and take the trade from 15 mins chart (intraday trade).
Awaiting your valuable advice.
Galen Woods says
January 16, 2018 at 6:48 PMThis particular application uses ADX as a timing device to enter the market. Hence, it’s advisable to use it on the smaller time frame in which you execute your trades.
Mike says
October 25, 2020 at 6:13 AMReading this and the Holy Grail, would it make sense to call it an entry point if the ADX2 dips below 25 and the ADX14 (or ADX20) is above 30 with an upward movement? Those would happen simultaneously to confirm a strong setup? Thanks
Galen Woods says
October 26, 2020 at 11:58 AMHi Mike, that’s an interesting idea. I haven’t examined that approach in-depth, but I’m sure it’s worth a closer study. (But I suspect the ADX14 filter will reduce the number of viable trades by quite a bit.)