Tips to Trade with the Directional Movement Index (DMI)

EnclaveFX Ltd
Nov 23, 2022

J. Welles Wilder created the Directional Movement Index (DMI), a momentum indicator.

However, some forex trading platforms isolates the Directional Movement indicator from the Average Direction Index. They are typically used together (ADX).

While the ADX demonstrates the strength of the price movement, Directional Movement shows how dominating the price movements are—whether they are on the downside or the upside.

We will go over the fundamentals of the Directional Movement Index and how to apply it in trading with forex in this blog.

Directional Movement Index (DMI): What is it?

A technical indicator called the Directional Movement Index compares the current price to the prior price range and is often displayed underneath the price chart.

An upward or positive directional indicator (+DI or +DMI) and a downward or negative directional indication are displayed as the Directional Movement Index (-DI or -DMI) outcome.

The Average Directional Index, or ADX, trend strength line is displayed by the Directional Movement Index, which is used to determine the strength of an upward or downward movement.

Two lines, +DI and -DI, are typically colored red and green, respectively. On the DMI, the third line, or ADX, displays the trend's strength.

Investors use ADX to assess the strength of an uptrend or decline while the -DI and +DI reveal direction. A strong trend is present when the ADX is above 25, which indicates.

The price is most likely drifting sideways when the ADX is below 20, however.

The Directional Movement Index (DMI) is calculated as the difference between the current day's high point and the day before. The -DI calculates the difference between the low point of the present day and the previous day.

The bigger of the current high and current low, recent high and previous close, or current low and previous close is the True Range.

The 14-period averages of the +DM, -DM, and ATR should be smoothed.

After that, we calculate +DI by dividing the smoothed +DM value by the smoothed average true range (ATR) value. Divide by 100.

Next, multiply by 100 and divide the smoothed -DM value by the smoothed TR value to obtain -DI.

Another indication added to the DMI is the average directional movement index (ADX), a smoothed DX average.

One must continue to compute DX values for at least 14 further periods to obtain the ADX, then smooth the outcomes.

How should one trade use the Directional Movement Index?

1. Use of +DI and -DI:

The market trends upward when the +DI line is higher than the -DI line, at which point traders can enter a long position.

2. Applying ADX

The market is trending when the ADX line is over 25 and ranging when the ADX line is below 25.

Many traders occasionally assume that the market is trending when the ADX is over 20 and not trending when it is below 20.

A reading of the ADX above 25 indicates a strong trend, whereas a reading below 25 indicates no strong direction and sideways price movement.

For trading with forex, a range approach, the ADX value should be lower than 20 and over 25 or 20 for trading trends.

3. Using +DI, -DI, and ADX: Traders can utilize +DI, -DI, and ADX individually and collectively for trading with forex

The Directional Movement Index (DMI) indicator and the Aroon Indicator have two lines. However, the DMI has an optional third line. The Aroon Indicator likewise has two lines. Both hands exhibit positive and negative movement, which aids in determining the trend.

Even though the calculations and the times of the crosses on each of the indicators vary,

Directional Movement Index's drawbacks include the following

When using the Directional Movement Index, one should exercise caution because it frequently generates false indications.

The +DI and -DI readings and crossovers are based on previous prices and do not predict what will happen in the future.

As a result, a crossover could lead to a losing transaction.

Additionally, the lines might overlap, resulting in several signals but no price trend. This can be prevented by only making trades based on long-term price charts and the more significant trend direction.

The Directional Movement Index should be utilized with other technical tools like volume, price actions, candlestick patterns, etc., to confirm the signals offered by this indicator, according to the experts at EnclaveFX Ltd.