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Adaptive Trading Strategy Based on ADX Indicator

Author: ChaoZhang, Date: 2024-01-17 15:33:37
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Overview

The core of this strategy is to use the ADX indicator to judge market trends, and combine the difference between DI+ and DI- to automatically identify breakout points for adaptive trading. When the difference between DI+ and ADX exceeds the set threshold, go long. When the difference between DI- and ADX exceeds the set threshold, go short. This strategy can automatically identify trend breakout points without manual intervention, suitable for medium and long term holdings.

Strategy Principle

  1. Calculate True Range, Directional Movement indicators to get DI+, DI-, DX and ADX indicators.

  2. Compare the difference amplitude1 between DI+ and ADX, and the difference amplitude2 between DI- and ADX.

  3. When amplitude1 is greater than the set threshold (e.g. 10), a long signal is generated. When amplitude2 is greater than the set threshold (e.g. 10), a short signal is generated.

  4. And require ADX to be between DI+ and DI- to filter out wrong signals.

Thus, when the market enters a trend, DI+ or DI- will notably lead ADX, generating trading signals. When the market trend ends, DI+, DI- and ADX will get close again, avoiding chasing highs and selling lows.

Advantages of the Strategy

  1. Automatically identify trend breakout points without manual judgment.

  2. Flexibly adjust the threshold of difference between DI and ADX to adapt to different market environments.

  3. Effectively filter out wrong signals by combining the ADX indicator.

  4. Longer holding periods, no need for high frequency trading, high capital utilization.

  5. Controllable pullbacks and stable growth.

Risks of the Strategy

  1. The ADX indicator lags and may miss short-term trading opportunities. Other indicators can be combined or ADX parameters can be reduced to improve sensitivity.

  2. Easy to be trapped in range-bound markets. Stop loss strategies can be introduced or ADX filtering conditions can be added to reduce the probability of being trapped.

  3. Prone to huge losses during major trend reversals. Moving stop loss or trailing stop loss can be set up to control risks.

Optimization Directions

  1. Test on different markets and products to find the optimal parameter combination.

  2. Consider incorporating other technical indicators to improve signal accuracy, e.g. MACD, KD etc.

  3. Add stop loss strategies to control drawdowns and maximum losses.

  4. Introduce position sizing to adjust positions based on market conditions.

  5. Optimize entry and exit criteria to reduce trading risks.

Conclusion

This strategy integrates the strengths of ADX and DI indicators to effectively judge trends and implement adaptive trading. No frequent trading needed, suitable for medium-long term holdings. There are also certain risks. Auxiliary technical indicators and risk management techniques need to be incorporated to improve strategy stability. The strategy idea is reliable and logically clear, worth in-depth research and application.

/*backtest
start: 2023-01-10 00:00:00
end: 2024-01-16 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © MAURYA_ALGO_TRADER

//@version=5
strategy("Monthly Performance by Dr. Maurya", overlay=true, default_qty_value = 15, commission_type = strategy.commission.percent, commission_value = 0.1)


len = input(14)
th = input(20)

TrueRange = math.max(math.max(high - low, math.abs(high - nz(close[1]))), math.abs(low - nz(close[1])))
DirectionalMovementPlus = high - nz(high[1]) > nz(low[1]) - low ? math.max(high - nz(high[1]), 0) : 0
DirectionalMovementMinus = nz(low[1]) - low > high - nz(high[1]) ? math.max(nz(low[1]) - low, 0) : 0

SmoothedTrueRange = 0.0
SmoothedTrueRange := nz(SmoothedTrueRange[1]) - nz(SmoothedTrueRange[1]) / len + TrueRange

SmoothedDirectionalMovementPlus = 0.0
SmoothedDirectionalMovementPlus := nz(SmoothedDirectionalMovementPlus[1]) - nz(SmoothedDirectionalMovementPlus[1]) / len + DirectionalMovementPlus

SmoothedDirectionalMovementMinus = 0.0
SmoothedDirectionalMovementMinus := nz(SmoothedDirectionalMovementMinus[1]) - nz(SmoothedDirectionalMovementMinus[1]) / len + DirectionalMovementMinus

DIPlus = SmoothedDirectionalMovementPlus / SmoothedTrueRange * 100
DIMinus = SmoothedDirectionalMovementMinus / SmoothedTrueRange * 100
DX = math.abs(DIPlus - DIMinus) / (DIPlus + DIMinus) * 100
ADX = ta.sma(DX, len)


//diff_1 = math.abs(DIPlus - DIMinus)
diff_2 = math.abs(DIPlus-ADX)
diff_3 = math.abs(DIMinus - ADX)

long_diff = input(10, "Long Difference")
short_diff = input(10, "Short Difference")

buy_condition = diff_2 >=long_diff and diff_3 >=long_diff and (ADX < DIPlus and ADX > DIMinus)
sell_condition = diff_2 >=short_diff and diff_3 >=short_diff and (ADX > DIPlus and ADX < DIMinus)


if buy_condition
    strategy.entry("Long Entry", strategy.long, comment = "Long")
if sell_condition
    strategy.entry("Short Entry", strategy.short, comment = "Short")



// Copy below code to end of the desired strategy script
///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
//                                 monthly pnl performance  by Dr. Maurya @MAURYA_ALGO_TRADER                        //
///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
show_performance = input.bool(true, 'Show Monthly Monthly Performance ?', group='Monthly Performance')

dash_loc_mp = input("Bottom Right","Location"  ,options=["Top Right","Bottom Right","Top Left","Bottom Left", "Middle Right","Bottom Center"]  ,group='Monthly Performance', inline = "performance")

text_size_mp = input('Small',"Size"  ,options=["Tiny","Small","Normal","Large"]  ,group='Monthly Performance', inline = "performance")

bg_c = input.color( color.rgb(7, 226, 242, 38), "Background Color", group='Monthly Performance')

text_head_color = input.color( color.rgb(0,0,0), "Month/Year Heading Color", group='Monthly Performance')

tab_month_c = input.color( color.white, "Month PnL Data Color", group='Monthly Performance')

tab_year_c = input.color( color.rgb(0,0,0), "Year PnL Data Color", group='Monthly Performance')

border_c = input.color( color.white, "Table Border Color", group='Monthly Performance')



var table_position_mp = dash_loc_mp == 'Top Left' ? position.top_left :
  dash_loc_mp == 'Bottom Left' ? position.bottom_left :
  dash_loc_mp == 'Middle Right' ? position.middle_right :
  dash_loc_mp == 'Bottom Center' ? position.bottom_center :
  dash_loc_mp == 'Top Right' ? position.top_right : position.bottom_right
  
var table_text_size_mp = text_size_mp == 'Tiny' ? size.tiny :
  text_size_mp == 'Small' ? size.small :
  text_size_mp == 'Normal' ? size.normal : size.large

/////////////////
strategy.initial_capital =50000

/////////////////////////////////////////////

// var bool new_month = na
new_month = ta.change(month) //> 0 ? true : false
newest_month = new_month and strategy.closedtrades >= 1

// profit
only_profit = strategy.netprofit
initial_balance = strategy.initial_capital

// month number
var int month_number = na
month_number := (ta.valuewhen(newest_month, month(time), 0)) //and month(time) > 1 ? (ta.valuewhen(newest_month, month(time), 0) - 1) :  12 //1 to 12

//month_year
var int month_time = na
month_time := ta.valuewhen(newest_month, time, 0) - 2419200000 


var int m_counter = 0
if newest_month
    m_counter += 1



// current month values
var bool new_year = na
new_year := ta.change(year)
curr_m_pnl = only_profit - nz(ta.valuewhen(newest_month, only_profit, 0), 0)
curr_m_number = newest_month ? ta.valuewhen(newest_month, month(time), 0) : month(time)
curr_y_pnl = (only_profit - nz(ta.valuewhen(new_year, only_profit, 0),0)) 



var float [] net_profit_array = array.new_float()
var int [] month_array = array.new_int()
var int [] month_time_array = array.new_int()


if newest_month
    array.push(net_profit_array, only_profit)
    array.push(month_array, month_number)
    array.push(month_time_array, month_time)



var float [] y_pnl_array = array.new_float()
var int [] y_number_array = array.new_int()
var int [] y_time_array = array.new_int()

newest_year = ta.change(year) and strategy.closedtrades >= 1
get_yearly_pnl = nz(ta.valuewhen(newest_year, strategy.netprofit, 0) - nz(ta.valuewhen(newest_year, strategy.netprofit, 1), 0), 0)
get_m_year = ta.valuewhen(newest_year, year(time), 1)
get_y_time = ta.valuewhen(newest_year, time, 0)

if newest_year
    array.push(y_pnl_array, get_yearly_pnl)
    array.push(y_number_array, get_m_year)
    array.push(y_time_array, get_y_time)
var float monthly_profit = na
var int column_month_number = na
var int row_month_time = na

 


var testTable = table.new(position = table_position_mp, columns = 14, rows = 40, bgcolor = bg_c, border_color = border_c, border_width = 1)
if barstate.islastconfirmedhistory and show_performance
    table.cell(table_id = testTable, column = 0, row = 0, text = "YEAR", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 1, row = 0, text = "JAN", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 2, row = 0, text = "FEB", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 3, row = 0, text = "MAR", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 4, row = 0, text = "APR", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 5, row = 0, text = "MAY", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 6, row = 0, text = "JUN", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 7, row = 0, text = "JUL", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 8, row = 0, text = "AUG", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 9, row = 0, text = "SEP", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 10, row = 0, text = "OCT", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 11, row = 0, text = "NOV", text_color = text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 12, row = 0, text = "DEC", text_color =text_head_color, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 13, row = 0, text = "YEAR P/L", text_color = text_head_color, text_size=table_text_size_mp)

    for i = 0 to (array.size(y_number_array) == 0 ? na : array.size(y_number_array) - 1)
        row_y = year(array.get(y_time_array, i)) - year(array.get(y_time_array, 0)) + 1
        table.cell(table_id = testTable, column = 13, row = row_y, text = str.tostring(array.get(y_pnl_array , i), "##.##") + '\n' + '(' + str.tostring(array.get(y_pnl_array , i)*100/initial_balance, "##.##") + ' %)', bgcolor = array.get(y_pnl_array , i) > 0 ? color.green : array.get(y_pnl_array , i) < 0 ? color.red : color.gray, text_color = tab_year_c, text_size=table_text_size_mp)
    curr_row_y = array.size(month_time_array) == 0 ? 1 : (year(array.get(month_time_array, array.size(month_time_array) - 1))) - (year(array.get(month_time_array, 0))) + 1
    table.cell(table_id = testTable, column = 13, row = curr_row_y, text = str.tostring(curr_y_pnl, "##.##") + '\n' + '(' + str.tostring(curr_y_pnl*100/initial_balance, "##.##") + ' %)', bgcolor = curr_y_pnl > 0 ? color.green : curr_y_pnl < 0 ? color.red : color.gray, text_color = tab_year_c, text_size=table_text_size_mp)
    

    for i = 0 to (array.size(net_profit_array) == 0 ? na : array.size(net_profit_array) - 1)
        monthly_profit := i > 0 ? ( array.get(net_profit_array, i) - array.get(net_profit_array, i - 1) ) : array.get(net_profit_array, i) 
        column_month_number := month(array.get(month_time_array, i)) 
        row_month_time :=((year(array.get(month_time_array, i))) - year(array.get(month_time_array, 0)) ) + 1 
        table.cell(table_id = testTable, column = column_month_number, row = row_month_time, text = str.tostring(monthly_profit, "##.##") + '\n' + '(' + str.tostring(monthly_profit*100/initial_balance, "##.##") + ' %)', bgcolor = monthly_profit > 0 ? color.green : monthly_profit < 0 ? color.red : color.gray, text_color = tab_month_c, text_size=table_text_size_mp)
        table.cell(table_id = testTable, column = 0, row =row_month_time, text = str.tostring(year(array.get(month_time_array, i)), "##.##"), text_color = text_head_color, text_size=table_text_size_mp)
       
    curr_row_m = array.size(month_time_array) == 0 ? 1 : (year(array.get(month_time_array, array.size(month_time_array) - 1))) - (year(array.get(month_time_array, 0))) + 1
    table.cell(table_id = testTable, column = curr_m_number, row = curr_row_m, text = str.tostring(curr_m_pnl, "##.##") + '\n' + '(' + str.tostring(curr_m_pnl*100/initial_balance, "##.##") + ' %)', bgcolor = curr_m_pnl > 0 ? color.green : curr_m_pnl < 0 ? color.red : color.gray, text_color = tab_month_c, text_size=table_text_size_mp)
    table.cell(table_id = testTable, column = 0, row =curr_row_m, text = str.tostring(year(time), "##.##"), text_color = text_head_color, text_size=table_text_size_mp)

//============================================================================================================================================================================
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