This indicator (ADX), which stands for Average Directional Index, is used to measure trend strength.
If the indicator tends to low values, there is almost no trend, but if the ADX takes high values, the main trend will be more significant.

Trading: Learning ADX on Ethereum

Figure 1 shows an example of using ADX on the Ethereum chart. The indicator, which varies from 0 to 100, is calculated over the past 5 days, and as you can see in the initial part of the chart, the indicator takes values above the average threshold line of 50 when there are prolonged and pronounced trends.
During the up-trend seen in Ethereum in early 2023, you could see the ADX rise from a value of 20 to highs of over 90.
Cryptocurrencies are essentially a market that spends a lot of time in a trend, whether it is bullish or bearish, and so it is very likely to see very high ADX values, as in the case just described.
The important distinction is also that the ADX tends to rise in both uptrends and downtrends. In sideways market situations or when there is no trend, the ADX stays at lower values or at least usually stays between 0 and 50.

Figure 1: Graphical representation of ADX on Ethereum
Having made these necessary explanations, it remains to understand how the information obtained by the indicator can be used in a trading strategy. It seems most logical, simply by observing the chart, to avoid following the trend during very long trend phases when the ADX has very high values.
This is because in reality when the market is already strong enough and the ADX is at high levels, continuing to follow the trend may not produce the desired results.

How to use ADX in trading: a test on Ethereum

So we move on to build a strategy (example entry shown in Figure 2) that trades only long positions in the Ethereum spot market.
The timeframe used is 15 minutes, and the highest high of the last 200 bars will be used as the entry level, and the lowest low of the last 200 bars will be used as a kind of trailing stop for long trades.
This trigger (or entry level) is calculated using the so-called price channel (or also Donchian channel), a very useful indicator for setting up trend following strategies.
To exit a position, on the other hand, the strategy provides for a stop loss, i.e., the level at which the maximum loss is set equal to 5% of the value of the position taken ($10,000), i.e., $500.

Figure 2: Example of an entry using the ADX strategy on Ethereum
Figure 3 shows the results of the optimized ADX values applied to the strategy just described. The results range from 5 to 100, and the condition included in the code is that we only work when the ADX is below a certain threshold. In fact, the condition gets tighter as the ADX value decreases, as evidenced by the number of trades that decrease as the ADX value decreases.

Figure 3: Optimizing ADX on Ethereum
It follows from these results that the strategy is already fundamentally making very good trades. In fact, at ADX values below 100, 95, 90, and generally high (and therefore not very strict) values, the strategy achieves very good results. As one moves toward more significant ADX values, one can see that the average trade, that is, the average profit per trade, increases and the relative drawdown decreases. Between 30 and 60 could be the most interesting cases, but the point that provides the most certainty is 50.
When this value is set, the strategy takes a very positive profit curve, and even the average trade, as observed during optimization, reaches $194, about 2% of the value of the position taken. Certainly, this is a very capacious value, potentially covering the costs of trading in this market.
A very good result, with even 2022 being positive, which is certainly another advantage of this strategy compared to the simpler "buy and hold" strategy, given the severe turmoil this market has experienced in the year under review. Even in the current year, 2023, amid a rebound in the underlying asset, the strategy was also able to repeat and improve on its previous historical highs.