What is DMI directional movement indicator in technical analysis?
DMI Directional Movement Indicator is a movement indicator developed by J. Welles Wilder. Some trading platforms separate the directional movement indicator from the average direction indicator (ADX). The directional movement indicator shows that the downward movement of the price is dominant, or its upward movement, and next to it, the ADX shows the strength of that movement. In this article, join Zand Traders to introduce you the important points related to the DMI directional movement indicator in technical analysis.
What is DMI Directional Movement Index?
The DMI Directional Movement Index is a technical indicator that is usually shown below or above the price chart. This indicator is calculated by comparing the current price with the previous price range and the result is displayed as a positive upward direction indicator (+DI or +DMI) and a negative downward direction indicator (-DI or -DMI).
They also calculate the strength of upward or downward movement through DMI and show the result with a trend line called Average Directional Index or ADX.
Directional indicators (+DI and -DI)
+DI and -DI are shown as two separate lines, usually green and red respectively on the chart. +DI is the difference between the highest price of the current day and the highest price of the previous day, and -DI performs the same calculation with the lowest price of the current day and the lowest price of the previous day.
When the red line is above the green line, it means that the price is falling. When the green line is above the red line, it means that the price is rising. If the -DI and +DI cross each other and are moving back and forth, there is probably no direct trend for the price to change.
Average Directional Index (ADX)
ADX is the third line in the DMI Directional Movement Indicator and shows the strength of the price trend. So, while -DI and +DI help determine direction, investors also use ADX to gauge how strong the trend is up or down. An ADX number above 25 indicates a strong trend is forming. When the ADX drops below 20, there is no clear price trend and the price is likely moving in the other direction.
Using DMI in trading
In order to use the DMI Directional Movement Indicator index in technical analysis, you should pay attention to this important point: when the +DI line is above the -DI line, the market is moving in an upward trend, and when the -DI line is above the +DI line, the market is moving in a downward trend.
Therefore, consider this strategy for trading, trade long positions when the +DI is above the -DI line; and when -DI is higher than +DI, prefer short positions. These indicators can be used in conjunction with ADX to filter or confirm trading signals.
Pay attention to this important point:
You can use DMI and ADX indicators separately. Some traders may use the ADX just to reinforce the price action, while others prefer the DMI to just see the price action.
The DMI Directional Movement Indicator is a technical indicator that can be used alongside a price chart to help traders identify opportunities. Generally, the DMI compares the current price with the previous price range. DMI is a combination of directional indicators (+DI and -DI) that measures the direction of the price trend. ADX also measures the strength of the trend. DMI can be used in any type of market and in popular markets as well.