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Whale Trading

DMI/ADX Trend Following: Separating Direction (DI) and Strength (ADX)

In this article, we cover a Trend Following Strategy based on DMI/ADX.

We assume you have already seen in DMI/ADX:

  • What +DI and -DI mean,
  • How ADX summarizes "Trend Strength",
  • How to distinguish between trending/ranging markets based on ADX values (e.g., 20, 25).

Here, we go a step further and design a strategy structure with the perspective:

Beyond just "+DI is above -DI so Buy, -DI is above so Sell", "What story does the DMI/ADX structure tell us about the current market direction and trend strength?"

The diagram below compares:

  • Left: Box (Range) Section where +DI and -DI cross frequently and ADX lies low.
  • Right: Strong Uptrend where +DI stays above -DI and ADX rises above the baseline and stays high.

Side by side.

Understanding this difference helps to distinguish:

  • "Should I view this as Trend Following Mode,
  • Or as Pullback/Range Trading Mode like the Mean Reversion Strategy family?"

1. How to Use DMI/ADX in This Strategy?

Traditional explanations often focus on "DI Crossovers" like:

  • +DI crosses above -DI → Buy Signal
  • -DI crosses above +DI → Sell Signal

However, in practice:

  1. ADX: Trend Strength (Exists/Does Not Exist)
  2. +DI / -DI: Which Side has the Edge (Direction)
  3. And combining with Support & Resistance Basics, Patterns, Volatility Indicators

gives more important information.

In this strategy, we limit the use of DMI/ADX to:

  1. Trend Filter

    • Is ADX above or below the baseline (e.g., 20~25)?
    • Is ADX rising or falling?

  2. Direction Filter

    • When ADX is at a meaningful level, which of +DI vs -DI is on top?

  3. Auxiliary Indicator for Other Trend Strategies

In summary, We use DMI/ADX as a "Trend Filter that separates Direction (DI) and Strength (ADX)", and do not cover DMI-only counter-trend trading in this strategy scope.

2. Settings and Timeframe: 14-Period DMI, Daily + 4-Hour Combination

The most widely used setting is:

  • Period: 14 (DMI/ADX 14)

In this strategy, we base it on the combination:

  • Daily DMI/ADX → Define Trend Strength/Direction Environment
  • 4-Hour DMI/ADX → Check for Direction Re-strengthening in Pullback Zones

You can use other combinations (4-Hour/1-Hour, etc.), but it is important to always maintain the role division:

  • Higher Timeframe: Environment Filter (Is there a trend?)
  • Lower Timeframe: Entry Timing & Risk Management

3. Distinguishing "Trend Environment" First with Daily DMI/ADX

First, we divide the Environment based on the Daily chart. Values may vary by market, but as an example:

  • ADX 20 or below: Weak or No Trend (Range/Chop)
  • ADX 20~25: Trend just forming or ambiguous zone
  • ADX 25 or above: Trend becoming distinct

3-1. Uptrend Advantage Environment (Long Bias)

If the Daily chart structure is:

  • ADX is maintained above the baseline (e.g., 20~25) or rising,
  • +DI is consistently maintained above -DI,
  • Even if a large correction occurs, +DI recovers above -DI and ADX lifts its head again.

→ Classified as an environment favorable for Long Direction Trend Following Strategy.

3-2. Downtrend Advantage Environment (Short Bias)

Conversely:

  • ADX is maintained above the baseline or rising,
  • -DI is consistently maintained above +DI,
  • Even if a rebound occurs, +DI goes up briefly but then goes back below -DI and ADX rises again.

→ An environment favorable for Short Direction Trend Following Strategy.

3-3. Box/Mixed Environment (Wait & See or Other Strategies)

The following cases are non-preferred zones in this strategy:

  • ADX shows a sideways movement near or below 20,
  • +DI and -DI repeat frequent crossovers,
  • Price also moves only between the top and bottom of the box based on Support & Resistance Basics.

At this time, it is natural to reduce trend following and consider range/pullback strategies like the Mean Reversion Strategy family.

4. Assisting Pullback Entry Timing with 4-Hour DMI/ADX

Let's look at an Uptrend (Long) example.

  1. Daily Environment

    • Structure where ADX is maintained above the baseline or dropped once and is rising again.
    • The section where +DI is maintained above -DI is long.
    • Based on 60-Day Moving Average Strategy, price is moving above MA-60.

  2. Price Enters Correction Swing on 4-Hour

  3. Points to Watch in 4-Hour DMI/ADX

    • Even if ADX temporarily lowers or lies sideways during the correction,
    • Does it prepare to lift its head upward again rather than collapsing significantly?
    • Does +DI go below -DI during correction, but re-break above -DI again near support?

  4. Combining with Price Structure

We consider entering the trend direction (Long) where ADX (Strength) + DI (Direction) + Price Structure + Volatility overlap like this.

In a Downtrend (Short), conversely:

  • During correction rebound, +DI temporarily goes up,
  • Then comes back below -DI near resistance based on Support & Resistance Basics,
  • And apply it by viewing the zone where ADX starts to rise again as a Short entry candidate zone.

5. Common Traps When Using DMI/ADX

5-1. Obsessing Only over ADX Numbers

  • Many say "Strong Trend" if ADX is 25 or higher,
  • But where and in what structure it crossed 25 is more important.

If ADX hits 30~40 at a very late point (late swing, overheated zone):

  • Rather than entering anew, it might be a zone to consider taking partial profits/reducing risk on existing positions from a Risk Management perspective.

5-2. Trading Only with +DI/-DI Crossovers

  • In a box market where ADX is low, +DI and -DI cross continuously without meaning.
  • If you accept all crossovers as "Buy/Sell Signals" at this time, losses are easy to accumulate quickly.

DI Crossover is only a "Candidate for Direction Change", and it only becomes meaningful when viewed with:

5-3. Overfitting with Other Trend Indicators

  • If you turn on MA, MACD, Ichimoku, DMI/ADX all at once,
  • And go with "Enter if all indicators are in the same direction",
  • It is easy to become a system that fits well only on past charts.

It is realistic to limit DMI/ADX to:

  • Using with one or two trend indicators (MA, MACD, etc.),
  • But as a secondary filter to confirm "Is this really a trending zone?".

6. Pros and Cons of DMI/ADX Trend Following Strategy

6-1. Pros

6-2. Cons/Cautions

  • If you trust the ADX baseline only as an arbitrary "Absolute Value", you often jump in late in the overheated zone of the late swing.
  • Abusing DI crossover signals in Range zones leads to consecutive losses.
  • Without R/R, Max Loss, and Position Size rules from a Risk Management perspective, it is difficult to protect the account no matter how good the indicator is.

7. Things to Ask Yourself Before Viewing DMI/ADX Signals

Whenever you find a zone where DMI/ADX looks good, it is good to check the questions below at least once.

  1. "Based on Daily ADX, is it a Trending Market now, or a Box/Mixed Zone?"

  2. "If I see a trend, which of +DI and -DI has the consistent edge?"

  3. "Is ADX lifting its head again in the 4-Hour pullback zone, and is DI realigning in the trend direction?"

  4. "Does this signal also mesh with Support & Resistance Basics, Patterns, and ATR?"

  5. "Do Stop-Loss/Target/Position Size fall within Risk Management rules?"

DMI/ADX is most practical when viewed as:

"A filter that shows 'Trend Exists/Does Not Exist' and even which side is stronger together"

If you:

  • First organize Environment (Trend vs Range) and Directional Advantage with Higher Timeframe DMI/ADX,
  • And design Pullback Entry and Risk Management by combining Lower Timeframe with Price Structure/Volatility,

You will be able to use it sufficiently as a core trend-following axis along with 60-Day Moving Average Strategy, MACD Strategy, and Ichimoku Strategy.