Ultimate Algorithmic Trading System

a trending market condition, whereas a falling ADX is saying the market has stopped
trending and is entering a congestion phase. This information is very useful but very
limited as well. The computer cannot determine which way the market is trending
by simply looking at the ADX value. The solution to this problem can be found by
comparing the +DI to the −DI. If the +DI crosses above the −DI, then the market is
considered in an uptrend. When the −DI crosses above the +DI, then the market
is in a downtrend.
Using this indicator in concert with a trend-following system may produce more
robust entry signals. I have seen many systems incorporating the ADX in an attempt
to eliminate ‘‘whipsaw’’ trades. Welles Wilder developed his own system around the
ADX, +DI, and −DI. Box 2.1 is a description of a system that incorporates the ADX
and a trailing stop for both long and short trades. The stop will get out of longs when
the market closes lower than the prior three-day closings and get out of shorts when
the market closes higher than the prior three days. This type of stop is not fixed as
it varies based on market movement. In other words, it is a dynamic stop. If we are
lucky to get in on a nice intermediate trend, the stop will follow the market in the
direction of the movement and hopefully lock in some profit.
Box 2.1 Welles Wilder’s Directional Movement System Description
30
STOCHASTICS AND AVERAGES AND RSI! OH, MY!
If 14-day ADX is greater than 35 then
If +DI > −DI, then Buy market on close
If −DI > +DI, then SellShort market on close
If 14-day ADX is less than 35, then
If position is long and close is less than lowest close of prior three days, then
Sell market on close.
If position is short and close is greater than highest close of prior three days,
then BuyToCover market on close.
Welles Wilder’s Directional Movement p–code
‘Wilder’s Directional Movement System
‘Assuming Wilder’s Indicator/Functions are built–in
‘Also Highest and Lowest functions
myADX = ADX(14) ‘14 period ADX calculation
myPlusDI = PDI(14) ‘ 14 period Plus DI
myMinusDI = MDI(14) ‘ 14 period Minus DI
if myADX > 35 then
if myPlusDI > myMinusDI then
Buy this bar on close
if myMinusDI > myPlusDI then
SellShort this bar on close
www.rasabourse.com