Directional Movement Index

Wed, 10 Jan 2007 06:39:57 MST Written by Tom Plesk

DMI Indicator - Directional Movement Index

Developed by J. Welles Wilder, the DMI indicator is a trend following indicator designed to determine first whether a currency pair is trending or non-trending before providing buy or sell signals in the direction of the trend.

Directional Movement Index (DMI) consists of three components:

• ADX measures whether a currency pair is trending or not trending
• Current Positive Directional Index (+DI)
• Current Negative Direction Index (-DI)

Welles Wilder

ADX is used very often as a trend-confirming indicator in forex trending systems. As a general rule, if ADX >= 25, the trend is confirmed, either up or down.

ADX Interpretation

• ADX readings below 20 indicate sideways movement or a very weak trend, either up or down.
• ADX readings at or above 25 indicate a trend, either up or down.
• ADX readings above 40 indicate a strong trend, either up or down.
• ADX readings above 80 are very rare and indicate an extremely strong trend, either up or down.
• ADX can be very useful for the currency trader if combined with a trending system such as the MA Cross trending system

Formula

ADX = modified moving average of DX (ADX fluctuates between 0 and 100)

DX = 100[+DI - (-DI)]/ [+DI + (-DI)]

Popular Trading Signals from Directional Movement Index (DMI)

When +DI rises above -DI, it can generate a buy signal for a new up trend, similarly, if +DI crosses below -DI, it can generate a sell signal for a new downtrend.

Go Long when

• +DI rises above the –DI
• ADX should be >= 25

Exit the position when +DI crosses -DI from above or when ADX falls below 20.

Go Short when

• DI rises above the +DI
• ADX should be >= 25

Exit the position when -DI crosses +DI from above or when ADX falls below 20.

Note: When ADX falls below 20 or both below +DI and -DI, this indicates a non-trending currency pair with low volatility (side ways movement).