Directional Movement Index
The directional movement index (DMI) is an indicator developed by J. Welles Wilder in 1978 that identifies in which direction the price of an asset is moving. The indicator does this by comparing prior highs and lows and drawing two lines: a positive directional movement line (+DI) and a negative directional movement line (-DI). An optional third line, called the average directional index (ADX), can also be used to gauge the strength of the uptrend or downtrend.When +DI is above -DI, there is more upward pressure than downward pressure in the price. Conversely, if -DI is above +DI, then there is more downward pressure on the price. This indicator may help traders assess the trend direction. Crossovers between the lines are also sometimes used as trade signals to buy or sell.
Definition:
The Directional Movement Index (DMI) is a technical analysis indicator developed by J. Welles Wilder in 1978 to determine the direction of asset price movements. DMI achieves this by comparing previous highs and lows and plotting two lines: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). An optional third line, the Average Directional Index (ADX), can also be used to measure the strength of the trend.
Origin:
DMI was first introduced by J. Welles Wilder in 1978 and detailed in his book, 'New Concepts in Technical Trading Systems.' Wilder developed this indicator to help traders better identify and evaluate market trends.
Categories and Characteristics:
1. Positive Directional Indicator (+DI): Represents the strength of upward price movements. When +DI is higher than -DI, it indicates greater upward pressure on prices.
2. Negative Directional Indicator (-DI): Represents the strength of downward price movements. When -DI is higher than +DI, it indicates greater downward pressure on prices.
3. Average Directional Index (ADX): An optional third line used to measure the strength of the trend. The higher the ADX value, the stronger the trend.
Specific Cases:
1. Case One: Suppose a stock's +DI line remains consistently above the -DI line over a period, and the ADX value is gradually increasing. This indicates a strong upward trend, and traders might consider buying.
2. Case Two: For a currency pair, if the -DI line remains consistently above the +DI line over a period, and the ADX value is also rising, it indicates a strong downward trend, and traders might consider selling.
Common Questions:
1. How to interpret the crossing of DMI lines? When the +DI line crosses above the -DI line, it is usually considered a buy signal; conversely, when the -DI line crosses above the +DI line, it is usually considered a sell signal.
2. What is the significance of the ADX value? The ADX value measures the strength of the trend. An ADX value above 25 is generally considered to indicate a strong trend, while a value below 20 indicates a weak or non-existent trend.
