R&D Blog
ADX Filter | Trading Strategy (Test 1: Filter Threshold & Entry)
I. Trading Strategy
Developer: J. Welles Wilder, Jr.: Average Directional Movement Index, a.k.a. Average Directional Index (ADX), Richard D. Donchian: Entry/Exit. Concept: Trend-following trading strategy based on Donchian Channels with the ADX filter. Source: Wilder, J. W. (1978). New Concepts in Technical Trading Systems. Greensboro: Trend Research. Research Goal: Performance verification of the Average Directional Index (ADX). Specification: Table 1. Results: Figure 1-2. Trade Entry: Long Trades: A buy stop is placed one tick above the Donchian Channel (i.e. UpperChannelOne[i − 1]). Short Trades: A sell stop is placed one tick below the Donchian Channel (i.e. LowerChannelOne[i − 1]). Index: i ~ Current Bar. Trade Exit: Table 1. Portfolio: 42 futures markets from four major market sectors (commodities, currencies, interest rates, and equity indexes). Data: 34 years since 1980. Testing Platform: MATLAB®.
II. Sensitivity Test
All 3-D charts are followed by 2-D contour charts for Profit Factor, Sharpe Ratio, Ulcer Performance Index, CAGR, Maximum Drawdown, Percent Profitable Trades, and Avg. Win / Avg. Loss Ratio. The final picture shows sensitivity of Equity Curve.
Tested Variables: Entry_Channel & ADX_Threshold (Definitions in Table 1):
Figure 1 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $0).
| STRATEGY | SPECIFICATION | PARAMETERS |
| Auxiliary Variables: | Entry Channels: UpperChannelOne(Entry_Channel) is the highest high over a period of Entry_Channel. LowerChannelOne(Entry_Channel) is the lowest low over a period of Entry_Channel. Exit Channels: UpperChannelTwo(Exit_Channel) is the highest high over a period of Exit_Channel. LowerChannelTwo(Exit_Channel) is the lowest low over a period of Exit_Channel. | Entry_Channel = [5, 200], Step = 5; Exit_Channel = 50% of the Entry_Channel; |
| Setup: | N/A | |
| Filter: | Average Directional Index (ADX): Definition Long/Short Trade Filter: Trade only when ADX[i − 1] >= ADX_Threshold. Index: i ~ Current Bar. | ADX_Look_Back = 14; ADX_Threshold = [0, 60], Step = 2; |
| Entry: | Long Trades: A buy stop is placed one tick above the UpperChannelOne[i − 1]. Short Trades: A sell stop is placed one tick below the LowerChannelOne[i − 1]. Index: i ~ Current Bar. | |
| Exit: | Channel Exit: Long Trades: A sell stop is placed one tick below the LowerChannelTwo[i − 1]. Short Trades: A buy stop is placed one tick above the UpperChannelTwo[i − 1]. Index: i ~ Current Bar. Stop Loss Exit: ATR(ATR_Length) is the Average True Range over a period of ATR_Length. ATR_Stop is a multiple of ATR(ATR_Length). Long Trades: A sell stop is placed at [Entry − ATR(ATR_Length) * ATR_Stop]. Short Trades: A buy stop is placed at [Entry + ATR(ATR_Length) * ATR_Stop]. Stop Loss Exit is used to normalize risk via position sizing. | ATR_Length = 20; ATR_Stop = 6; |
| Sensitivity Test: | Entry_Channel = [5, 200], Step = 5 (bars) ADX_Threshold = [0, 60], Step = 2 | |
| Position Sizing: | Initial_Capital = $1,000,000 Fixed_Fractional = 1% Portfolio = 42 US Futures ATR_Stop = 6 (ATR ~ Average True Range) ATR_Length = 20 | |
| Data: | 42 futures markets; 34 years (1980/01/01−2014/9/30). |
Table 1 | Specification of Trading Strategy.
III. Sensitivity Test with Commission & Slippage
Tested Variables: Entry_Channel & ADX_Threshold (Definitions in Table 1):
Figure 2 | Portfolio Performance (Inputs: Table 1; Commission & Slippage: $100 Round Turn).
IV. Rating: Average Directional Index (ADX) | Trading Strategy
A/B/C/D
V. Summary
The Average Directional Index (ADX) does not add value to the base case trend-following model (Figure 1-2).
Related Entries: ADX Filter (Filter Threshold & Look Back) | Combined Donchian Channels (Entry & Exit) | Donchian Channel (Entry & Exit 1) | Donchian Channel (Entry & Exit 2)
Related Topics: (Public) Trading Strategies
CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
RISK DISCLOSURE: U.S. GOVERNMENT REQUIRED DISCLAIMER | CFTC RULE 4.41
Codes: matlab/donchian/2-channels-with-adx/