Trend following · Intermediate · Weekly check
ADX Trend Filter
How it works, and when it doesn't.
ADX > 25 means a trend exists. Combining this with a direction signal (like SMA crossover) dramatically improves hit rate because you only trade in trend conditions.
ADX=15.7 below 20 — no trend present. DI+=30.2, DI-=28.7. Ranging market. Cash.
Why it works
The ADX (Average Directional Index) measures trend strength, not direction. Using it as a filter means you only trade moving average signals when the market is actually trending — eliminating the worst whipsaw periods.
The signal logic
- Compute ADX(14) — measures trend strength 0-100 scale
- Only consider longs when ADX > 25 (trend is strong enough to trade)
- Combine with directional indicator (DI+ > DI-) for entry
When it fails
Choppy markets where ADX stays below 20 for extended periods — no trade signals are generated, causing missed returns in moderate uptrends.
- Best market
- Strong trending markets, breakout periods
- Worst market
- Low-ADX sideways markets, range-bound 2011-2012
Backtest
| Sharpe ratio | -0.45 |
| Annual return | -6.0% |
| Worst drawdown | -27.2% |
| Trades in the backtest | 63 |
Backtest on daily bars, positions taken the bar after the signal (no look-ahead).
ADX Trend Filter, live.
Re-scored after every close.
The platform runs this and 32 other strategies against the live tape each day — with the evidence behind every number.