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Towards a better understanding of the MA-ADX system, make sure you have read our previous lesson Steps To Create and Trade A Mechanical Forex Trending Trading System first.
The MA-ADX trending system consists of two moving averages that will spot a new trend + a trend-confirming (ADX) indicator to confirm the new trend.
The MA-ADX trading system should attempt to accomplish 2 goals:
1. Be able to identify a new trend as soon as possible
2. Confirm this trend to avoid most false break or whipsaw signals
Trading Setup
- 1 hour chart
- Currency pair: GBP/USD
- MA-Cross trending system consists of 200SMA(close) and 5EMA(close)
- 14 period ADX trend-confirming indicator
Trading Rules
Stop Loss Rules
- If going long, place stop loss below most recent support level, if going short, place stop loss above most recent resistance level
Entry Rules
1. Enter long if:
- 5 EMA crosses the 200 SMA from below
- ADX>=25
2. Enter short if:
- 5 EMA crosses the 200 SMA from above
- ADX>=25
Exit Rules
- Exit if stop loss has been hit (worst case scenario)
- Exit if 5 EMA crosses the 200 SMA in the opposite direction
- Exit if ADX falls below 20
Money Management Rules
- 1% risk per trade of total equity
How does our MA-ADX trending system look like?
The above chart shows the MA-ADX trending system trading setup: A two moving average-cross system that will spot a new trend and the ADX indicator used to confirm the new trend, this to avoid most false breakouts or whipsaws.
Trade entry
Trade walkthrough
1) According to our system trading rules (the 5 EMA crosses the 200 SMA from above and ADX>=25 ), we got a signal to sell the GBP/USD at 1.9575.
2) We place our stop-loss 1 pip above the above most recent resistance level, in our case stop-loss would be at 1.9606.
3) Total pips to risk on this trade is 1.9606-1.9575 = 31 pips
4) According to one of our exit rules (ADX falls below 20), we close the trade around 1.9260 for an amazing 315 pips gain.
Now, let's assume we have a big fat $100,000 mini forex trading account and according to our money management rules, we only risk 1% per trade.
Let's do some math..
How many lots can we trade?
Equity risk = $1000
Pip risk = 31 pips
1 pip = $1(mini forex account)
Lot size calculation
$1000/31 pips = $32,25/pip
We can trade 32 mini lots without exceeding our 1% risk rule.
How much money would we have made?
$1/pip x 32 mini lots x 315 pips = $10080 or 10% gain on our account.
In this particular case, we would’ve made an amazing pip gain. Keep in mind that not all trades can be successful, we will have losses too, it is just part of our business.
Remember that taking profits can be done in many ways and it is just a matter of your trading style.
Some ideas:
1) Use a trailing stop-loss to lock in profits meaning that if the currency price moves in your favor by ‘Z’ amount, you move your stop by ‘Z’ amount.
2) Close 1/2 of your position if the trade moves 'Y" pips in your favor, or close the trade completely if the price moves 100 pips in your favor.
3) Choose support and resistance levels as target levels.
4) Simple wait to take profits when your system tells you to do.
Summary
The key to success and profit is sound money management and risk control. Always calculate your lot size and make sure you never exceed 1% or 2% risk per trade, most professional and successful currency traders never exceed 1% risk per trade. It is how you use risk control and trading discipline that will make the difference between success and failure.
Although you want to be right on every trade, remember that not all trades can be successful and a losing trade(s) does not mean the system is a failure. Before going LIVE, always test your system on a demo account.
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