Directional Movement Index

Directional Movement Index

The DMI is an indicator developed by J. Welles Wilder in 1978 that identifies in which direction the price of an asset is moving. The indicator does this by comparing prior highs and lows and drawing two lines: a positive directional movement line (+DI) and a negative directional movement line (-DI). An optional third line, called directional movement (DX) shows the difference between the lines. When +DI is above -DI, there is more upward pressure than downward pressure in the price. If -DI is above +DI, then there is more downward pressure in the price. This indicator may help traders assess the trend direction. Crossovers between the lines are also sometimes used as trade signals to buy or sell.

The Formulas For the Directional Movement Index (DMI) Are:

+DI=( [ Smoothed +DM] / ATR ​)×100

-DI=( [ Smoothed -DM ​] / ATR )×100

DX=( [ ∣+DI+-DI∣ ] / [ ∣+DI−-DI ∣​ ] )×100

Where:

+DM (Directional Movement)=Current High−PHPH=Previous high

-DM=Previous Low−Current Low

Smoothed +/-DM=∑t=114​DM−(14∑t=114​DM​)+CDM

CDM=Current DM

ATR=Average True Range​

Key Features

• The Directional Movement Index (DMI) is composed of two lines, and an optional one, showing selling pressure (-DI), showing buying pressure (+DI), and a third DX line showing the difference between the former positive and negative lines.
• A +DI line above the -DI line means there is more upward movement than downward movement.
• A -DI line above the +DI line means there is more downward movement than upward movement.
• Crossovers can be used to signal emerging trends. For example, the +DI crossing above the -DI may signal the start of an uptrend in price.
• The larger the spread between the two lines, the stronger the price trend. If +DI is way above -DI the price trend is strongly up. If -DI is way above +DI then the price trend is strongly down.
• The Average Directional Movement Index (ADX) is another indicator that can be added to the DMI.
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