APF Trading

ICHIMOKU TREND TRADING - CONFIRMATION WITH ADX 12 February 2011

Ichimoku Trend Trading

- Confirmation with ADX Indicator

APF Trading Pte. Ltd.
9 Battery Road
12F Straits Trading Building
Singapore 049910
Glenn Ho
glenn.ho@apftrading.com
This article assumes the reader has basic knowledge of the Ichimoku Kinko Hyo trading system.
As you know, Ichimoku Kinko Hyo is predominantly a trend-following indicator, with multiple
confirmations in built within the system. We will share with you here how you can further enhance
the system by utilising other (Western) indicators to confirm or better time your trades , for trend
following in particular. The indicator we are discussing is the Average Directional Index (ADX)
Indicator.

Jay Ng
The ADX was developed by J. Welles Wilder to determine the strength of a trend, and whether the
jay.ng@apftrading.com
market is trending or not, regardless of direction. This is useful because markets tend to range
about 80% of the time and if you are a trend trader, you will not want to miss the trends or enter
Website: trades prematurely. The ADX is an oscillator which fluctuates between 0 and 100, with a reading
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above 20 signalling a trend, and a reading above 40 signalling a strong trend.
www.asiapacfinance.com

In most charting packages, the ADX line is accompanied by 2 other lines called the Positive
Directional Indicator (+DI) and the Negative Directional Indicator ( -DI). Generally, a buy signal
occurs when +DI moves above -DI and a sell signal when +DI moves below the +DI. In a ranging
market, this happens frequently and produces trade-unfriendly whipsaws so it is not advisable to
trade solely on +DI/-DI crossovers.

Using ADX with Ichimoku Kinko Hyo

APF Trading Pte. Ltd.

9 Battery Road
12F Straits Trading Building
Singapore 049910

Glenn Ho
glenn.ho@apftrading.com

Jay Ng
jay.ng@apftrading.com

Website:
www.apftrading.com
www.asiapacfinance.com

Figure 1: Ichimoku Chart with ADX Indicator Below

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APF Trading
ICHIMOKU TREND TRADING - CONFIRMATION WITH ADX 12 February 2011

Ichimoku traders commonly use the Tenkan Sen/ Kijun Sen cross for trend following entry/exit
triggers, with confirmations from the other elements such as the kumo break and direction of
future kumo, as well as the Chikou Span.

Entry Confirmation

However, from the chart above, it is evident that the ADX is also a powerful way to confirm a trend.
Starting from the left (black) vertical line of the green shaded portion, you will see that Tenkan Sen
has not yet crossed Kijun Sen. During this time, the Ichimoku Kinko Hyo system alone will paint a
bearish price action picture. But observe that +DI is above –DI, giving an early signal of a bullish
movement. The ADX is also above 20, signalling a strengthening trend. A confirmation from both
the indicators gives a trader more conviction in a bullish sentiment.

Exit Confirmation

Likewise, observe the right (black) vertical line of the green shaded portion. With Tenkan Sen
above Kijun Sen and a thick bullish Kumo ahead, price is strongly trending upwards. However, we
see the +DI crossing below the –DI, signalling a bearish sentiment and a potential exit on long
positions. It works out very well in this scenario to exit the long position as we see shortly after
price starts to head south. This showcases how the ADX can be timelier in trade exits, as opposed
to waiting for the Tenkan Sen to cross below Kijun Sen (9 periods later). Another way traders
observe the ending bullish trend is through the divergence observed, when price is making higher
highs while the ADX reading is making lower highs.

Not every trade will paint such a “perfect” picture but ADX can be an extremely useful buddy to
pair with the Ichimoku Kinko Hyo, as you have seen. And this works across multi assets classes.

APF Trading is a trading advisory firm offering clients advice on multi-asset trading strategies,
signals, trading systems, execution services and trading platforms. The firm also conducts research
and technical analysis with a focus on Ichimoku Kinko Hyo and DeMark Indicators.

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