Directional movement index (DMI) is one type of momentum indicators. It was developed by J. Welles Wilder. DMI shows which movement is stronger, the downside or the upside. Before trading using the directional movement index, you need to understand these following things.
The Definition of the Directional Movement Index
DMI is a technical indicator placed below or above the price chart. It calculates by comparing the current price to the previous price range.
It displays the result of both an upward directional index (+DI) and downward directional index (-DI). Other than that, DMI also shows the strength of both downward and upward movement. It shows the result of that calculation as a trend strength line. Some people call it the average directional index.
+DI and –DI has two separate lines, one is in green and the other is in red. If the green line is above the red line, then the price is currently rising. But, if the –DI and +DI are crisscrossing each other, then there is no price trend that happens.
The strength of the trend is shown in the third line on the indicator, or the ADX. An ADX reds more than 25 signals when a strong price happens. While if it only has less than 25 signals, then there is no strong trend.
Also read: Market Indexes Effect on Your Investment
The Ways to Use Directional Movement Index in Trading
You can use the DMI in both trending and ranging markets. Generally, the market is moving upward when the +DI line is above the –DI line. Contrarily, the market is moving downward if the –DI line is higher than the +DI line.
If you trade using trending strategy, choose going long if the +DI line is above the –DI line. Then, you can go short, if the –DI line is above the +DI line.
The market is trending when the ADX line is in more than 25 and ranging when it is below 25.
