In this video, we will try to answer a frequently asked question among traders: Is it possible to make profits using technical analysis indicators?

We put the Average Directional Index (ADX), a widely known indicator for evaluating trend strength, to the test to understand this.

We applied it to a trend-following strategy that was not performing satisfactorily, and the results were surprising: using the ADX significantly improved the strategy's metrics, increasing both average trade and net profit.

However, the real surprise lies in how we used the ADX, which is entirely different from how most traders typically use indicators...

Watch the video now and discover the method we use! 😉

Transcription

Can we profit with indicators?

Hey everyone, and welcome. In this new video, we return to talk about indicators and their use in trading.

We all know oscillators and indicators are widely used tools, especially by discretionary traders.

They are often used as confirmations or even generators of market entry or exit signals.

But we also know that most traders lose money in the markets. So wouldn't that mean that maybe the indicators are useless?

Well, we're going to be trying to answer this question from the perspective of a systematic trader.

Today we’ll focus on the ADX indicator, one of the most famous indicators used to measure the trend of a market, and we’ll see if this indicator can help us in our trading or not.

One of the coaches at Unger Academy here.

Strategy used for the test: trend following on Gold Future

So as systematic traders, all we can do is start by coding a trading system.

Do you have to be a programmer to do that? Absolutely not!

In fact, at Unger Academy, we have a proprietary tool that can generate codes in Easy Language for platforms like TradeStation and MultiCharts.

This software is called Composer, and it allows us to generate the code for a strategy with a few very simple clicks.

For example, we have prepared the code for a breakout strategy, which means it takes advantage of an upward or downward trend in the market.

We have added the necessary inputs to make this trading system work on Gold futures.

The system presents breakout entries based on the high or low of the previous session.

We then coded the exits with a stop loss, a take profit, a break even, and an exit after two sessions.

Now we can generate the code. So just click on "Generate code."

Perfect, under "Output" we have the generated code.

We don’t need to understand every single line of this code.

We can just simply copy and paste it into the PowerLanguage Editor.

Okay, so let's go and open a blank sheet of paper, then copy and paste it.

We compile the strategy and simply insert it into our chart.

Now for the sake of simplicity, we’ve already included it here.

So let's go and see what the results of this trading system are.

Performance of the strategy without the indicator

We have an equity line that grows a little bit.

The strategy is making about $160,000.

But I tell you already, it has an average trade of $60 that could be a good start but is still not enough.

Not enough because the trading costs can sometimes be even higher than that average trade.

Moreover, then the form of the equity is still not so good.

In fact, we have an extended period, from 2016 to 2019, where this strategy didn’t perform well.

Without going into too much detail about the trading system, we said that this strategy, this method of trading, is based on breakout entries.

It is based on trend following.

For example, you can see here that we go short, so we sell a contract when the market seems to be in a bearish trend.

And we go long, so we buy, when the market seems to be bullish.

How to insert the ADX indicator into the strategy

We haven’t talked about indicators yet. Why is that? Because in Unger Academy, indicators are used not as signal generators but more as filters.

In fact, we could look for a specific trend condition that could help us to filter out the trades that closed with a loss.

How can we do that? By inserting our ADX indicator in the code.

Again, we’re also using Composer to do this part, so there’s no need to know how to code ADX in the PowerLanguage Editor.

In fact, I take our software back and go to the entry settings and say, "filter entries based on ADX."

Let's click on the checkmark. Let's regenerate the code.

We copy and paste the output.

And then what happens, I’m telling you already, is absolutely nothing.

That’s because we have the ADX filter built into our trading system, but we aren’t using it yet.

In fact, ADX is a number that can have a value between 0 and 100, and in our case, we entered it as an input equal to 100.

You see, an "ADX th" appeared here, which stands for the threshold value.

Using ADX as a filter with a threshold of 100 means absolutely nothing, meaning that we’ll only operate in the market if the ADX is below 100, but the fact is that it is always below 100.

How to optimize the value of the ADX

So, to activate the filter, we have to look for those values we want to operate below by filtering out all the others.

So, we could do a simple optimization to see what would happen if we filtered the trades using the ADX with values ranging from 0 to 100.

This requires only one simple step.

We’ll optimize this strategy.

To do this, we select our ADX parameter, and we can optimize it from 0 to 100 in steps of 5.

Here, 21 combinations come out. This doesn’t take long.

Perfect. The optimization is complete. I’d just like to point out that the number of trades is 0 when the ADX filter is equal to zero.

Effects of the ADX on the strategy's performance

It’s like telling the strategy, "trade only when ADX is less than 0." But ADX can have a value from 0 to 100, so if we set the threshold to 0 we’ll never trade.

In the latter case, ADX=100, we’ll always trade.

So let us see if there is a value worth using this indicator or not.

Indeed, we see that both average trade and net profit increase when the value of ADX decreases.

We start at 58 and then steadily increase until we are in this range of 50-55.

The average trade is going up, and the net profit is also increasing.

In fact, in this case, we're filtering about 700 trades, since we go from 2700 to 2000.

We improve the gain and, above all, we reduce the drawdown.

This is an excellent result. As you can see, this threshold, this range of 45 to 60, seems to be a perfect range to go and filter our trades.

Indeed, let us use the threshold of 50 as an example.

This means that all entries with an ADX above 50 will be inhibited, and the performance will be more than reasonable.

In fact, with this trading system, which is really very simple and requires only two clicks, we get results that start to be interesting.

The average trade is indeed approaching $100. We have many trades and a really non-trivial gain.

How we use indicators in systematic trading

We could go further into our study. I mean, we haven’t optimized the exits, the stop loss, or the take profit yet. So we could go further to improve this system even more.

But what I wanted to do is just to highlight in this video is the way in which a systematic trader approaches indicators.

Did you see how different our approach is?

We don’t use the indicator to give us the entry signals. We use it to help filter out the worst trades.

In this case, we’re talking about trades that would be opened when the trend was already very strong, that is, above the 50 threshold.

If you would like to learn more and explore these topics in more depth and perhaps don’t have the experience to master the tools presented, then I recommend you click on the link below.

This link will take you to a page where you will find some very useful resources. From there, you can sign up for a free presentation by Andrea Unger, and get our best-selling book, “The Unger Method”, covering just the shipping costs. Or you can book a call with a member of our team to receive a completely free strategic consultation.

Finally, I’d like to please remind you to subscribe to our channel, if you haven't already done so, and click on the notification bell to stay up-to-date on the release of our new videos. And if this video was helpful, please remember to leave us a Like as well.

Thank you so much for your attention, and I’ll see you in the next video with more and new trading insights. Will see you soon!

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