Directional movement (DMI) is useful in determining the existence and strength of trend.
DMI Directional Movement Index was developed by Welles Wilder and developed in his book New Concepts in Technical Trading Systems.
The use of directional movement requires several indicators:
+ DI: directional indicator up. This indicator is used to represent the strength of the upward movement. The higher the indicator, the higher the bulls are strong.
DI: directional indicator of decline. It measures the level of force bearish. More DI-higher strength is strong bearish movement.
ADX: Average Directional Movement: This indicator measures the strength of the trend.
ADXR: Average Directional Movement Index Rating: The ADXR moving average ADX smooth movements ADX.
Method of calculation
DMI calculation is quite complex.
1) First determine DM + and DM-in time t
DM + = max (0; highest day - high day)
DM-= max (0; lowest standby - the lowest of the day)
2) Then calculate the True Range (TR)
TR corresponds to the largest value between the highest and lowest day, the highest of the day and the last day and the day's low and close of the previous day.
TR = max (abs (the highest of the day - the lowest of the day), ABS (higher end of the day before), ABS (the lowest of the day - the last day))
Abs means that the values in brackets are absolute (always a positive value, it is actually the difference between the value 0 and the absolute value of -3 is equal to 3)
3) Lastly DI + and DI.
= DI + DM + / TR
DI - = DM-/ TR
ADX is a moving average directional movement index (DX) with a method: smoothing Wilder.
DX = 100 * ((Di +) - (Di)) / ((Di +) + (Di))
Simplify the ADX is:
ADXR calculated as momentum ADX.
ADXR = (j + ADX ADX n) / 2
ADX ADX j be the calculation at time t (ADX day).
ADX n is the value of ADX n, n is the time.
Application for trading:
DMI can be useful in several cases:
To determine the trend and highlight the power of this: Comparison of ADX and ADXR. If these two indicators borders (0-100) below 20, the market is considered without a trend. If ADX and ADXR above 20, the market trend.
ADXR averaged ADX. Crossing after ADX compared with ADXR signal is weak trend.
ADX ADXR and do not give the direction of the trend, but the strength of it. A change in the ADX above 40 indicate a strong trend that can be bullish or bearish.
These two indicators help a trader in selecting tools and methods that can be different, if the market moves or trend.
To determine the relative strength of the bullish / bearish: Comparison of DI and DI +. + DI measures the strength of upward movements, DI-force movements bearish. The calculation of these two indicators is over a certain period (14 by default from Wells Wilder). Buy or sell signal is determined by the intersection of the DI + and DI-.
Sell signal is generated when the + DI falls below DI.
This signal will be stronger if the ADX is high.
There is usually present a histogram represents the difference between the DI + and DI.
To minimize false alerts, Wilder recommends taking into account the extreme point ("extreme point rule"). When the + DI crossed up Di highest achieved during the formation of the plug should be identified. Bullish signal will be triggered when prices will break that level in the next candle. The opposite is true when the DI crosses above the + DI.
