The Directional Movement Indicator (DMI) was created by J. Welles Wilder, and is explained fully in his book, New Concepts in Technical Trading Systems. I delve into this indicator in this post.
The Directional Movement Index (DMI):
What is the DMI?
The DMI is a technical trading indicator that can help traders determine the direction and strength of a trend, and it consists of 2 lines:
- The Positive Directional Line, known as +DI
- The Negative Directional Line, known as -DI
By comparing price highs and lows, the +DI measures upward price movement and the -DI measures downward price movement. These lines are then smoothed over a specific period.
The default period setting on most trading platforms for the DMI is 14. Wilder also recommended this. Choosing a shorter period will make the indicator more sensitive to price and produce more signals. Longer periods will produce less signals and will be less sensitive to short-term noise.
How does It Work?
The main ways to interpret the DMI are as follows:
- When +DI has a sustained move above -DI, it indicates that there is more upward pressure in price, which suggests an uptrend.
- When -DI has a sustained move above +DI, it indicates that there is more downward pressure in price, which suggests a downtrend.
- Large distances between the +DI and -DI indicates a strong trend.
- When there are multiple crossovers (or almost crossing over) of the +DI and -DI over a certain period of time, it suggests that price is ranging / consolidating.
- Crossovers between the 2 lines can be seen as buy or sell signals, for example: when the +DI crosses above the -DI, it is suggests a buy signal, and vice versa.
Note: All indicators produce false signals; the DMI is no different.
See chart below:
Please note that the above chart was cherry picked for explanation purposes. In real trading, charts will not always set up as nicely. As with all indicators, it is best for the trader to study and pick what works best for him / her.
Finally:
The Average Directional Index (ADX) is derived from the DMI and they are often used together. I will be writing about the ADX in my next post.
Thanks so much for reading. I hope that your trading is treating you well. All the best.
Thanks and Regards,
Trading SOS SOS
