Exploring ADXcloud-Micro-Trend Strategy

What is ADX?

The Average Directional Movement Index (ADX) is a popular tool in the technical analysis used to gauge the strength of market trends. Created by J. Welles Wilder in 1978, it’s widely utilized across various financial markets, including stocks, futures, and forex. The ADX converts price movements over time into a numeric value; a high score suggests a strong trend, while a low score indicates a weaker trend. Typically, an ADX value above 25 suggests a notable market trend, and values above 50 indicate a powerful trend. Fluctuations in ADX values also help signal potential changes in market direction.

Calculating ADX

• First, calculate the True Range (TR), which is the greatest of the differences between the highest and lowest prices, the highest price and the previous day’s closing price, and the lowest price and the previous day’s closing price.
• Next, calculate the Directional Movement (DM), which is split into upward (+DM) and downward (-DM) movements. +DM is the difference between the current high and the previous high if positive; otherwise, it’s zero.
• -DM is the difference between the previous and current low if positive; otherwise, it’s zero.
• Then, calculate the 14-day moving average of TR (ATR), the Positive Directional Indicator (+DI), and the Negative Directional Indicator (-DI), which are +DM and -DM divided by ATR multiplied by 100, respectively.
• Calculate the Directional Index (DX) as the absolute difference between +DI and -DI divided by their absolute sum multiplied by 100.
• Finally, ADX is the 14-day moving average of DX.

The calculation formula for ADX can be summarized as follows:

ADX = 14-day moving average of DX

Upon reviewing the market trends of the past year, it is evident that, as depicted in the area marked “①” within the blue box in the accompanying chart, the ADX value decreased to below 25 following a downturn in the market. However, in the “②” region, several days passed after the ADX dropped below 25 before the market began to decline. This illustrates that while the ADX indicator can reflect trend strength and offer insight into trend reversal points, it still exhibits a certain degree of lag.

Source: TradingView

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What is ADXcloud?

As shown in the accompanying diagram, the ADX indicator exhibits some delay in reflecting market changes. Notably, despite stable prices at that time, the ADX still registered above 25, suggesting a solid upward trend. This prompted the creation of the ADXcloud, an enhanced version of the ADX, which integrates three new parameters:

• Alpha1: Coefficient for initial smoothing
• Alpha2: Coefficient for secondary smoothing
• Period: Duration of the ADXcloud cycle

Furthermore, ADXcloud incorporates the RSI index with:

• adx_t: Duration of the ADX cycle
• rsi_t: Duration of the RSI cycle
• rsi_treshold: Threshold for initiating trades with RSI
• rsi_close_t: Threshold for closing trades with RSI

These additional parameters better align the index with trend dynamics, enabling ADXcloud to forecast shifts in market trends more effectively. Here’s how it’s calculated:

1. Directional Changes

Calculate the increase (‘up’) as today’s highest price less yesterday’s highest price.

Calculate the decrease (‘down’) as yesterday’s lowest price less today’s lowest price.

Positive Directional Movement (+DM) occurs if ‘up’ is greater than the maximum of ‘down’ or zero; otherwise, +DM is zero.

Negative Directional Movement (-DM) occurs if ‘down’ is greater than the maximum of ‘up’ or zero; otherwise, -DM is zero.

1. True Range (TR)

TR is determined as the maximum of the following: the difference between today’s high and low, the absolute difference between today’s high and yesterday’s close, and the absolute difference between today’s low and yesterday’s close.

1. Movement Direction

How to Calculate the Movement Direction Indexes:

+DI(14)：+DM(14)/TR(14)100

-DI(14)：-DM(14)/TR(14)100

The number 14 represents the period parameter, which tells us the timeframe for analyzing these movements.

1. Diplust and Diminust

Diplust is a formula that combines the current positive direction indicator (+DIt), the previous positive direction indicator (+DIt−1), and the previous smoothed value (Diplust−1), all adjusted by a weighting factor alpha1, which you can choose.

Diminust is similar to Diplust but for the negative direction indicators. It combines the current, the previous, and the previously smoothed negative direction indicators, adjusted by the same weighting factor alpha1, which you can set according to your preference.

How to Smooth Out Movement Direction Indicators:

The first round of smoothing:

Diplust = 2 × ( + DIt) + (alpha1 − 2) × ( + DIt−1) + (1 − alpha1) × Diplust−1

Diminust = 2 × ( − DIt) + (alpha1 − 2) × ( − DIt−1) + (1 − alpha1) × Diminust−1

Alpha1 is the weighting factor for the first smoothing phase, further refining the indicators.

The second round of smoothing:

Alpha2 is the weighting factor for this second smoothing phase, further refining the indicators.

1. How to Calculate ADXcloud

When Should You Use ADXcloud?

The ADXcloud and DAX indicators are employed to assess trends, while the RSI (Relative Strength Index) is a momentum indicator that gauges the velocity and magnitude of price fluctuations. Typically, an RSI above 70 suggests an overbought condition, while below 30 indicates an oversold state. Using ADXcloud in tandem with RSI can boost your chances of success. A strategy considered to have a high success rate involves certain conditions for entering and exiting trades:

Entry Conditions:

• To go long (buy): Enter a trade when ADXcloud is greater than 0 and RSI is above 50.
• To go short (sell): Enter a trade when ADXcloud is less than 0 and RSI is below 50.

Exit Conditions:

• To close a long position: Exit the trade when RSI exceeds 50 plus a specific RSI close threshold (rsi_close_t) or when ADXcloud shifts from positive to negative.
• To close a short position: Exit the trade when RSI falls below 50 minus a specific RSI close threshold (rsi_close_t) or when ADXcloud shifts from negative to positive.

How to Get Started with ADXcloud Strategy on Gate.io

Gate.io makes it easy and code-free for users to deploy the ADXcloud strategy. As of April 12, 2,405 ADXcloud strategy bots were running, with investments topping $313,000 and a seven-day annualized yield of 26.60%. Follow this step-by-step guide to get started.

1. Navigate to Gate.io and select “Trading Robots” from the top menu. Proceed to ”Robot Plaza,” choose “Create Robot,” and then access the “Contract CTA page.”

Source: Gate.io Strategybot

1. Scroll to locate the ADXcloud strategy option, and click to start creating your strategy, leading you to a setup page as shown below.

Source: Gate.io Strategybot

You’ll be naming and describing your trading bot, setting up a profit-sharing ratio for others who follow your trades. The trading environment allows for both USD and cryptocurrency-based transactions, with the option to engage in perpetual contracts across a wide range of cryptocurrencies.

For clarity, USD-based transactions involve profits or losses in stablecoins. Cryptocurrency-based transactions mean your profits or losses change the quantity of the cryptocurrency you’re trading with. For example, in a Bitcoin-based contract, losses reduce your Bitcoin count while gains increase it.

You’re also provided with options to set your leverage multiplier according to your risk tolerance and to specify your investment amount either directly or by adjusting a percentage slider. Additionally, you can configure stop-loss and take-profit limits to automatically halt your strategy after reaching a certain profit or loss level.

Regarding the bot’s strategy settings

Parameter Configuration: Under the stop-loss and take-profit parameter settings are the robot’s strategy parameter configurations, which include two smoothing exponents, ADX period, RSI period, RSI opening threshold, and closing threshold, as well as the period and the number of orders placed.

Each index has certain default values:

• ADX smoothing coefficient 1: Required, integer, input range [1,99], default 20
• ADX smoothing coefficient 2: Required, integer, input range [1,99], default 17
• ADX period: Required, integer, input range [3,50], default 14
• RSI period: Required, integer, input range [3,50], default 8
• RSI opening threshold: Required, integer, input range [1,25], default 5
• RSI closing threshold: Required, integer, input range [1,40], default 25; and the RSI closing threshold value must be greater than the RSI opening threshold value
• Period: Standard MA (Moving Average) parameter. Mandatory, options include 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 8 hours, 1 day, default 1 hour
• Number of orders placed: Optional, default is blank

Source: Gate.io Strategybot

Conclusion

In summary, ADXcloud represents a trading strategy designed for contracts that focuses on adapting to market trends. It enhances the traditional ADX approach by offering better volatility and trend sensitivity, particularly for cryptocurrency assets, thus achieving a higher success rate. When used with the RSI indicator, which evaluates trend strength, it markedly increases the accuracy of trend predictions.

Beyond ADXcloud, Gate.io features an array of trading bots that utilize various strategies, including those based on MACD, MACD-RSI, double moving averages, and Bollinger Bands. You’re invited to explore more of these strategies at Gate.io’s Robot Square.