Directional Movement Index - DMI

What

An indicator developed by J. Welles Wilder for identifying when a definable trend is present in an instrument. That is, the DMI tells whether an instrument is trending or not. The ADX line can be calculated using the DMI and indicates the strength of the trend. The ADX is covered in more detail in this e-book – please use the contents page as a reference to locate the full ADX definition.

How

Up Move = Today's High - Yesterday's High

Down Move = Yesterday's Low - Today's Low

if Up Move > Down Move and Up Move > 0, then +DM = Up Move, else +DM = 0

if Down Move > Up Move and Down Move > 0, then -DM = Down Move, else -DM = 0

After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:

+DI = exponential moving average of +DM divided by Average True Range

-DI = exponential moving average of -DM divided by Average True Range

The exponential moving average is calculated over the number of periods selected, and the average true range is an exponential average of the true ranges

When

The Directional Movement Index can be used in both ranging and trending markets. In general, when the +DI line is above the -DI line, the market is moving upwards, and when the -DI line is above the +DI line, the market is moving downwards. The ADX line shows the strength of the move, and the market is considered to be trending when the ADX line is above 30, and ranging when the ADX line is below 30. There are several trading systems that use the DMI, so there are several alternative uses of both the DI lines, and the ADX line.