Directional Movement Index

The Directional Movement Index (DMI) recognizes whether a trend is present and quantifies the strength of that trend. DMI fluctuates between 0 and 100. The probability of a trend increases as DMI increases.

DMI is composed of three lines: +DI, -DI and the Average Directional Movement Index (ADX), where +DI measures buying pressure, -DI measures selling pressure, and ADX measures the spread between the two indicators and the strength of the trend.

Many analysts use DMI as part of their basis for making buy and sell recommendations. When the +DI line crosses above the -DI line, it's typically viewed as a signal to buy. And, the +DI line passing below the -DI line is generally interpreted an indicator to sell.

The ADX line signifies the strength of the current trend, and many analysts warn against trading when the ADX values decrease significantly, as it may be a sign that the security isn't actually trending. Some analysts use an ADX value of 20 as a confirmation level for a trending market

Calculations

+DI = 100 * wSum(+DMI, n) / wSum(TR, n)

-DI = 100 * wSum(-DMI, n) / wSum(TR, n)

where n = DI Interval
wSum = Welles Summation (Sum = Value + Sum.1* (n - 1) / n)

The DMI is calculated as follows...

HiDiff = HI - HI.1 (current high - previous high)
LoDiff = LO.1 - LO (previous low - current low)

if (HiDiff < 0="" and="" lodiff="">< 0)="" or="" (hidiff="LoDiff)">
+DMI = 0
- DMI = 0

if (HiDiff > LoDiff) then
+DMI = HiDiff
-DMI = 0

if (HiDiff < lodiff)="">
+DMI = 0
-DMI = LoDiff

True Range = TR

MA(TR, Type, Period)

TR = MAX{ABS(HI - LO), ABS(HI - CL.1), ABS(CL.1 - LO)}

Sample Chart View Graphic

In addition to these crossover rules, analysts believe one should also follow the extreme point rule. When a crossover occurs, use the extreme price as the reverse point. For a short position, use the high made during the trading interval of the crossover. Reverse a long position using the low made during the trading interval of the crossover.


The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.

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