Directional Movement Index

The Directional Movement Index is a somewhat complex momentum indicator developed by J. Welles Wilder and explained in his book New Concepts in Technical Trading Systems published in 1978.

Most indicators have a main weakness: they are not suitable for markets with strong or weak trends.

The main characteristic of the Directional Movement Index is that it first identifies whether the market is in a trend before providing a signal.

The Directional Movement Index measures the ability of market forces to move the price outside of yesterday's trading range.

It consists of three curves:

1. The positive directional indicator (+DI) summarizes the bullish trend movement,
2. The negative directional indicator (-DI) summarizes the bearish trend movement,
3. The average directional movement index (ADX) indicates whether the market is or is not in a trend.

Example

Interpretation

The DMI curve system is used to detect trends and then generates buy or sell signals. According to the author, the market follows a strong trend for only about one-third of the time. The goal of the DMI is to try to detect a significant trend. When the market is not following a marked trend, the DMI should keep you out.

The interpretation of the -DI and +DI curves determines buy or sell signals:

1. When +DI crosses above -DI, it is a buy signal.
2. When the reverse occurs, it is a sell signal.
3. The ADX curve reveals trends: the higher the ADX, the stronger the trend, and vice versa.
   If the ADX curve is above 20, there is a trend; otherwise, the market is without trend.

Note: The author recommends applying this method to securities with a high CSI (Commodity Selection Index) (greater than 25).