When to use dmi?

The Directional Movement Index (DMI) is an indicator that helps in determining the direction the asset price is moving and the strength of the price movement. It does so by comparing the current price with previous lows and highs, drawing lines of positive directional movement (+DI) and negative directional movement (-DI).

The placement of +DI and -DI, with respect to each other, determines the direction of pressure in price. If +DI is higher than -DI, the pressure in price is more upward, indicating a buying signal, and if -DI is higher, the pressure in price is more downward, indicating a selling signal.

The Directional Movement Index also includes an optional line called the Average Directional Index (ADX), showing the strength of the upward or downward trend.

True Range (TR) is the maximum of the absolute value of:

If current high minus previous high is greater than the previous low minus current low,

+DM = Current High – Previous High

If +DM is negative, then +DM is taken as 0

If current high minus previous high is less than the previous low minus current low,

-DM = Previous Low – Current Low

If -DM is negative, then -DM is taken as 0

If both +DM and -DM are positive and +DM is greater than -DM, then the value of +DM is current high minus previous high and -DM is 0. Similarly, if -DM is greater than +DM, then the value of +DM is 0, and -DM is previous low minus current low.

TR for the first 14 periods = Total of first 14 readings of TR

Next 14 period TR = First 14 period TR  – (Previous 14 period TR)/14 + Current TR

+DI = (Smoothed +DM / Smoothed TR value) x 100

-DI = (Smoothed -DM / Smoothed TR value) x 100

4. Compute Directional Index (DX)

The Directional Movement Index (DMI) helps in assessing the trend direction and providing trade signals. If +DI line is higher up than -DI line, the market is believed to be trending upwards, and a long trade can be taken. Similarly, if -DI line is higher up than +DI line, a short trade is taken, as the market is believed to be trending downwards.

The DMI can be used to confirm the trend of the price signal. The trend is stronger if the spread between +DI and – DI is larger. If +DI is far above -DI, it indicates a strong upward trend. If -DI is far above +DI, the price trend is strongly moving downwards.

The market is considered to be trending if the ADX line is over 25 and ranging if the ADX line is under 25. Sometimes traders consider the above 20 ADX reading as trending and non-trending for below 20. A reading of above 25 for ADX signifies a trend of a strong signal, whereas below 25 signifies that there is no strong trend, and the price is moving either in a weak trend or sideways. The ADX reading should be over 25 or 20 for trading strategies that trade trends, and lower than 20 for trading a ranging strategy where the price movement is sideways.

It is common to obtain +DI, -DI, and ADX in the same window; however, the indicators can also be used individually. Some traders may only analyze ADX for the strength of the trend, whereas some traders may choose to analyze only the direction movement lines of the DMI to assess the direction of price movement.

To learn more about the Average Directional Movement Index (ADX), check out CFI’s Trading Using Technical Analysis course!

They are usually used in the combined form but some trading platforms separate the Directional Movement indicator from the Average Direction Index (ADX).

Directional Movement shows how dominant the price movements are, either downside or upside is dominant whereas the ADX shows the price movement strength.

In the blog we will discuss the basics of the Directional Movement Index and how to use this indicator in trading:

The Directional Movement Index is a technical indicator that is usually shown below the price chart and compares the recent price with the previous price range.

The Directional Movement Index shows the result as an upward or positive directional indicator (+DI or +DMI) and a downward or negative directional indicator (-DI or -DMI).

The Directional Movement Index is used for calculating the upward or downward movement strength and shows the trend strength line known as the Average Directional Index or ADX.

+DI and -DI are two separate lines which are usually coloured green and red respectively. ADX is a third line on the DMI that shows the strength of the trend.

So, while the -DI and +DI shows direction, investors use ADX to analyse the strength of that uptrend or downtrend. An ADX with a reading above 25 shows that a strong trend is in place.

Whereas when the ADX falls below 20, it shows that the price is likely moving sideways.

+DI is the difference between the highest price of the current day and the highest price of the day before, and -DI does the same calculation with the current and previous day’s lows.

The True Range is the greater of the current high – current low, the current high – previous close, or the current low – previous close.

After this one should smooth the 14-period averages of +DM, -DM, and the ATR.

Then we divide the smoothed +DM value by the smoothed average true range (ATR) value to get +DI. Multiply by 100.

Then divide the smoothed -DM value by the smoothed TR value to get -DI and Multiply by 100.

The average directional movement index (ADX) is a smoothed average of DX and is another indicator that is added to the DMI.

For calculating the ADX, one needs to continue to calculate DX values for at least 14 periods and smooth the results for getting ADX.

When the +DI line is higher than the -DI line, then the market is said to be trending upwards, and traders can take a long trade.

Similarly, if -DI line is higher than +DI line, then a short trade can be taken and the market is said to be trending downwards as shown below:

The DMI can be used to confirm the trend of the price signal. The trend is stronger if the spread between +DI and – DI is larger.

If +DI is far above -DI, it indicates a strong upward trend. If -DI is far above +DI, the price trend is strongly moving downwards.

When the ADX line is over 25 then the market is said to be trending and ranging if the ADX line is under 25.

Sometimes many traders also consider the market is trending when ADX is above 20 ADX and non-trending for below 20.

An ADX reading above 25 signifies a strong trend whereas below ADX 25 signifies that there is no strong trend, and the price is moving sideways.

To trade trends the ADX reading should be over 25 or 20 and the ADX reading should be lower than 20 for trading a ranging strategy.

Traders can also collectively use +DI, -DI, and ADX as well as individually for trading purposes.

Some traders may only analyse ADX for analysing the strength of the trend, whereas some traders may analyse only the direction movement lines of the DMI for analysing the direction of price movement.

The DMI indicator is composed of two lines with an optional third line whereas the Aroon indicator also comprises two lines. Both the indicators show positive and negative movement that helps in identifying the trend direction.

Although the calculations are different and also the crossovers on each of the indicators occur at different times.

Directional Movement Index produces a lot of false signals; thus, one should be careful while using this indicator.

The readings of +DI and -DI and crossovers depend on historical prices and they do not reflect what will happen in the future.

Thus, a crossover can occur that would result in a losing trade.

Also, the lines may crisscross which may give multiple signals but no trend in the price. This can be avoided by only taking trades in the larger trend direction that is based on long-term price charts.

There are multiples DMI and ADX scans available in StockEdge through which you can filter out stocks accordingly:

Usually, this indicator performs better when combined with other oscillators. However, even the individual signals exhibited by this indicator are very useful. The key in any sort of trading is to identify the direction of a stock's trend. One can find a high price or low price, but if he/she is unable to determine the direction, then the trade setup becomes highly questionable. In that regard, the DMI does assist in identifying the immediate trend in daily and weekly charts. +D rising above 25 value is recognized as a bullish sign and encourages buying momentum, which may see a sudden upside. On the negative side, -D rising above 25 value is considered as a sell / weak signal.

On a bigger time frame like monthly and yearly, +D crossing 30 value is recognized as a bullish trend with the security expected to rise further. Whenever the DX climbs the 50 value, the trend is said to be highly bullish on the daily time frame.

Whenever, the +D and –D make a crossover, the trend is expected to shift in a more concrete manner in the respective trend in all time frames.

That said, usually, this indicator is not used in the intraday time frame as the signals get a little delayed in terms of the sudden spike in security.

The Directional Movement Index (DMI) assists in determining if a security is trending and attempts to measure the strength of the trend. The DMI disregards the direction of the security. It only attempts to determine if there is a trend and that trends strength.