ADX-Filtered Stochastic Reversals for Trend Trading

Summary

This strategy pairs ADX trend-strength filtering with Stochastic Oscillator crossovers. It calculates ADX from directional movement and true range using Wilder smoothing, then smooths the Stochastic %K and %D lines. A long entry occurs when ADX exceeds its threshold and %K crosses above %D in oversold territory; a long exit uses the corresponding crossover in overbought territory. The example also describes adjustable indicator parameters, chart displays, alerts, and equity-based position sizing.

The document explains the logic and implementation but provides no reported performance results. It identifies important limitations: ADX can lag, Stochastic signals can appear early during persistent trends, and results may depend on parameter choices. The described rules do not include a stop loss, and the long-only code does not use ADX direction to ensure trades follow the prevailing trend. Backtesting, directional filters, and explicit risk controls are suggested as possible improvements, not demonstrated findings.

Key ideas

• ADX is used to screen for sufficient trend strength before acting on Stochastic signals.
• A long entry requires an oversold %K line to cross above %D, while an overbought cross below is used to close the position.
• The example manually computes ADX with Wilder smoothing and smooths Stochastic values with moving averages.
• The rules are parameterized and include alert conditions, but no performance evidence is reported.
• Lagging trend confirmation, persistent overbought or oversold readings, and missing stop losses are key risks.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.