Filtering DMI Crossovers with ADX for Trend Following

Summary

This trend-following system uses the Directional Movement Index to select trade direction and the Average Directional Index to filter for trend strength. A crossover of +DI above -DI signals a long entry, while a cross below signals a short entry; trades are allowed only when ADX exceeds a threshold. The described defaults use 14-period DMI and ADX settings, an ADX threshold of 25, a 1% stop, and a 2% profit target. Stops and targets are set as percentages of the average entry price.

The document explains the intended benefit of avoiding weak, choppy conditions, but supplies no backtest performance results. It cautions that these lagging indicators can enter late, reversals can cause drawdowns, and choppy markets may trigger repeated stops. Trading costs and position sizing also affect outcomes. The published test configuration uses BTC/USDT futures on four-hour bars over several months, but those settings alone do not show profitability or robustness. Proposed refinements include trend confirmation, adaptive thresholds, dynamic stops, and parameter testing across market conditions.

Key ideas

• DMI crossovers provide trade direction, while ADX acts as a trend-strength filter.
• The described defaults use a 25 ADX threshold, a 1% stop, and a 2% profit target.
• The document provides no backtest results to establish the strategy's effectiveness.
• Lagging signals, reversals, choppy markets, and trading costs can weaken performance.
• The published test settings use BTC/USDT futures on four-hour bars.

Tags

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