The Directional Movement Index (DMI) combines the average directional index (ADX), plus directional indicator (+DI), and minus directional indicator (-DI) into one graph that depicts the strength of positive or negative market forces. By plotting the directional indicators together with the ADX line, traders can get a sense of overall movement and determine a trend’s strength and direction.
The DMI is a useful illustration of a key point: the ADX is most useful when combined with other indicators to determine whether it makes sense to trade with a trend. The ADX normally depicts three lines in order to give traders an accurate depiction of both the strength and direction of trends: the Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI), as well as the ADX lines. The DIs indicate trend direction, while the ADX depicts trend strength.
The crossover points and comparisons between the three lines are used for technical analysis and as trading signals. Traders typically look for crossovers of the -DI and +DI lines to determine whether to make a trade. A potential buy signal is represented by the +DI line crossing above the -DI line with the ADX over 20 – or even better, above 25. The -DI crossing above the +DI with an ADX over 20 or 25 indicates a short trade opportunity. An ADX value below 20 indicates a trendless price, which most traders interpret as a less advantageous time to trade the security. ADV crossover above 40 and back below it often indicates the end or reversal of a trend.
The +DI may cross over the ADX, pulling it higher, and indicating an uptrend, but if the ADX crosses over the +DI it may indicate that the strength of the uptrend is fading, as the +DI dropping means that the -DI must be growing, indicating the ADX may possibly change direction.
Traders should be wary of crossovers, which can occur quite frequently and result in losses if not evaluated with other factors. False signals are more common with ADX values below 25, but reversals can also happen above that threshold.
No single indicator works well for all securities, but they should not be discounted. The DMI should be used with other indicators, price analysis, and tools to mitigate risk and misleading signals. Artificial intelligence services from Tickeron provide traders with a powerful way to evaluate trade ideas, analyze signals, and provide key confirmation to help investors make rational, emotionless, and effective trading decisions.
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