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Combining ADX and IBS - Edge

Combining the AdX and IBS indicator to find a turning point in the market, could hold some merit. With this edge that’s exactly what we do in the SPY that tracks the S&P 500 index. 

Edge Details

Market:

S&P 500

Security:

SPY/ES

Access Level:

Silver

Profit Factor: 16.08

Avg. Trade: $181

Win Percent: 92%

Trades: 37

A Closer Look

As can be seen in the infobox above, this edge trades the S&P 500 that tracks the S&P 500. However, it should work well on other securities that track the same index as well.

With an impressive 92% winning rate this edge is a good start on a trading system!

Also, the fact that the backtest is carried out on nearly 20 years of data , is an indication that the edge is persistent throughout time, and might also perform well into the future!

The edge is composed of:

  1. A Mean Reversion Setup.
  2. A Moving Average Filter 
  3. An IBS Filter
  4. A Trend Strenght Filter
  5. Two Exits With Different Logics

 1. A Mean Reversion Setup.

To determine when the market is likely to turn around we use a filter that measures the price relative to previous bars. The logic is as follows:

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Feel free to experiment with the lookback length.  Maybe a longer or shorter period produces better results?

2. A Moving Average Filter

The next filter of the edge has got to do with moving averages.  You need to be a Silver member to have access to this post.

3. An IBS Filter

If applied right, IBS is a powerful tool that traders can use in strategy creation.

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4. A Trend Strenght Filter

We will also use an indicator to measure the strength of the market before a trade is entered.

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5. Two Exits With Different Logics

This edge uses two exits. The first one tries to identify when the market has gone from oversold to overbought, and the second one will exit the position if the first exit has not become active within a reasonable amount of time.

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How Does It Work?

The edge described in this post works through mean reversion, and tries to identify when price moves into oversold territory.

The first, and third components(the mean reversion setup and IBS) are used to define the oversold condition.

The second component (the moving average) is used to ensure that the market is in a state that makes it likely to turn around soon.

The fourth filter (the trend strength filter) is used to ensure that the market is moving with the right amount of speed and force for the setup to be effective.

Logic

Below the rules of this very edge are defined for you to replicate in your own testing;

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