ADX and MACD Strategy

The ADX and MACD are powerful technical indicators in their own right. Both can be used to spot forex market trends and to gauge the momentum of these trends. Whilst using one of the indicators can produce many buying or selling signals, you can help to filter them out by confirming each trade using an ADX and MACD strategy that combines the signals of both indicators. When you add to this price action analysis such as candlestick formations and support/resistance, you can create more complete forex strategy compared to relying on just one technical indicator.

What is the ADX?

ADX stands for Average Directional Movement Index and can be used to help measure the overall direction and strength of a trend. The ADX has 2 lines that cross to show the direction price is moving and a level from 0-100 that shows the strength of the trend. Anything above 20 is considered a trend with some momentum. If the ADX is lower than 20, the market is probably ranging.

The ADX trend strategy can be a good way to time entry into a currency pair trend when there is an ADX crossover and the indicator is above 20. However, there can be lots of false signals when using the ADX on its own, which is why we combine if with other indicators such as the MACD.

What is the MACD?

The moving average convergence divergence (MACD) is a technical indicator that shows the relationship between two moving averages of a currency pairs price. Its purpose is to reveal changes in a trend’s direction, strength, momentum, and duration in the underlying currencies price.

The moving average crossover can be used for timing entry into trends whilst MACD divergence can help to establish the trend direction and momentum. We look for the MACD histogram to cross above the zero line or the signal line. If the MACD is above 0 and the signal line, the market might be trending upwards. If it is below both, the market may be falling.

How to trade the ADX and MACD strategy?

We will be combining the ADX and MACD signals to find buy and sell setups. The must both agree with the trade direction which will help us to avoid some of the false signals but it is not possible to skip them all. For that reason, we will need sensible forex money management and a favourable risk to reward ratio. We don’t want one bad trade wiping out a consecutive run of winners.

If the MACD histogram is above the signal line, we will look for buy trades. The trade setup will be confirmed with the ADX +DI line being above the -DI line which is a bullish signal. The ADX should also be above 20 showing the trend has some momentum. For a sell trade, we will simply look for the opposite. The MACD below the signal line, ADX -DI below the +DI and above 20. We will also keep an eye out for MACD divergence in the direction we want to trade.

Buy signal

  • ADX (14) +DI is above -DI
  • ADX (14) is above 20
  • MACD (12, 26, 9) main line is above signal line
  • MACD (12, 26, 9) divergence to the upside
  • Price bouncing from support or breaking resistance
  • Bullish price action

You can see in the USD/CAD 1-hour chart below that the MACD has crossed above the signal line and there is bullish divergence. The ADX +DI being above the -DI and above 20 confirms there is momentum to the upside. Price is bouncing from a strong support level that has been tested a few times. There is also a bullish double bottom candlestick pattern confirming the trade. We could have placed the stop loss just below the support level which is only 10 pips. Considering this uptrend went on for over 300 pips, there were plenty of pips to be made. We could have exited the trade when the ADX fell below 20 showing the trend was losing momentum.

ADX MACD Strategy Buy Signal
ADX MACD Strategy Buy Signal

Sell signal

  • ADX (14) -DI is above +DI
  • ADX (14) is above 20
  • MACD (12, 26, 9) main line is below signal line
  • MACD (12, 26, 9) divergence to the downside
  • Price bouncing from resistance or breaking support
  • Bearish price action

In the USD/CAD 1-hour chart below, you can see that all of the conditions for a MACD and ADX sell trade have been met. The ADX -DI is above the +DI and is greater than 20 which shows downwards momentum. The MACD main line is below the signal line and although we don’t have relevant MACD divergence at this point, the price has moved from away from a resistance level. There are also doji candlesticks showing market indecision that is followed by three black crows confirming sellers are winning the battle. The stop loss could have been placed just above the recent resistance level which is around 50 pips. That gives a very favourable risk to reward ratio as price fell over 500 pips on this sell trade. The ADX losing momentum (<20) or the MACD crossing above the zero line could have been potential exit points but may have been slightly premature.

ADX MACD Strategy Sell Signal
ADX MACD Strategy Sell Signal

ADX MACD strategy Pros & Cons

Pros

  • Clear actionable buy and sell signals
  • Can catch some big market moves
  • Time entry and exit into the market
  • Any currency pair and timeframe
  • MACD and ADX indicators are free to use

Cons

  • Takes some practice to get used to
  • MACD and ADX signal need further confirmation
  • Requires sensible money management
  • There will still be false trading signals

MACD vs ADX

The MACD and ADX are 2 of the most popular technical indicators for trend trading forex strategies. They can both not only show you the direction in which a currency pair is moving, but also the momentum of a move. This does mean they serve a similar purpose but it is nice to get that extra confirmation when looking to buy in an uptrend or sell in a downtrend. I think they both give decent entry and exit signals using crossovers, but there will be a lot of false signals on both without additional price action and technical analysis. An overbought or oversold indicator such as the RSI and CCI could compliment them well.

Conclusion: is the ADX and MACD forex strategy worth trading?

I think the ADX MACD strategy can be a good way to spot entries into strong trends. However, it does require further confirmation in terms of price action analysis. As with any forex strategy, you will need excellent money management and discipline. This can be the difference between a winning and losing system.

If you like the look of the ADX and MACD strategy, you could always give it a try on a demo account to see how it goes. You can get a free forex demo account from most forex brokers. I would always practice any manual or automated forex strategy on demo at first in order to understand how it works and see if it produces the desired results before making any commitment.