The Series of Technical Analysis Studies Chapter 5: “Directional Moving Index”

What is a Directional Moving Index?
The Directional Movement Index (also known as DMI) is a momentum indicator developed by J. Welles Wilder. The DMI is actually part of a series of technical indicators developed by Wilder, so some trading platforms split up the indicators, providing Directional Movement as one indicator and ADX as another. DMI tells you when to be long or short. It is especially useful for trend trading strategies because it differentiates between strong and weak trends, allowing the trader to enter only the strongest trends.

How does it work?
The +DMI generally moves in sync with price, which means the +DMI rises when price rises, and it falls when price falls. It is calculated by comparing the current price with the previous price range. DMI then displays the result as an upward directional index (+DI) and a downward directional index (-DI). The DMI also calculates the strength of the upward or downward movement and displays the result as a trend strength line called Average Directional Index or ADX.
+DI and -DI show up as two separate lines, coloured green and red respectively. When the red line is above the green line, it means the price is dropping. When the green line is above the red line, it means the price is rising. ADX is a third line on the indicator, and it shows the strength of the trend.
How to Calculate DMI in IRIS PLUS?
Open New Chart -> Press “S” -> Select Directional Moving Index -> Click on Parameter -> Enter no. of period -> Click “OK”
Key points to remember:
  • The great feature of DMI is the ability to see buying and selling pressure at the same time
  • The DMI indicator is actually a couple of indicators which can be used together (or on their own)–the Directional Movement lines (-DI and +DI) and the ADX.
  • when the +DI line is above the -DI line, the market is moving upwards,
  • When the -DI line is above the +DI line, the market is moving downwards.
  • The ADX line shows the strength of the price move. The market is considered to be trending when the ADX line is above 25
  • ADX is also used to filter & confirm the trade signals of DDI

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