Directional Movement Index (DMI)

Directional Movement Index (DMI)

Type

Trend IndicatorHistory

Developed by Welles Wilder the Directional Movement Index helps determine if a security is "trending.

How does it work?

The Directional Movement Index measures the ability of bulls and bears to move price outside the previous day's trading range. The index consists of three lines:

Trading Signals

The values of DI s are between 0 and 100. The greater the value of the +DI, the stronger the bullish market. Likewise, the greater the value of the DI the stronger the bearish market.

When the +DI rises above the DI, a buying signal is generated.

When the +DI falls below the DI, a selling signal is generated.

To avoid whipsaws these signals should only be taken when the ADX turns up from below both DI lines.

Profits should be taken if the ADX line turns down from the DI lines.

Even though the DI scale is from 0 to 100 readings above 60 are relatively rare. Low readings below 20 reflect a weak trend, whilst higher readings above 40 reflect a strong trend.

Settings

Sharechart Default:  +DI 10 period, -DI 10 period, ADX 0 period

Example

Below is the weekly chart for Colorado Group Ltd. The Directional Movement Index is shown below the graph. Note there is a bullish crossover in March at approx $2.50 then in October there is a bearish crossover at approx $3.50; a gain of approx 40% in 7 months.

The setting for the DMI indicator for the graph above was +DI 10 period, -DI 10 period, ADX 0 periods, as shown below. It can be modified by going to Settings > Indicators > Directional Movement Index (DMI).