DMI (Directional Movement Index )

created in 1978 by J. Welles Wilder, who also created the popular relative strength index.

 The Directional Movement Index - DMI is a valuable tool for assessing price direction and strength. DMI tells you when to be long or short. It is especially useful for trend trading strategies because it differentiates between strong and weak trends, allowing the trader to enter only the strongest trends. DMI works on all time frames and can be applied to any underlying vehicle (stocks, mutual funds, exchangetraded funds, futures, commodities and currencies).

DMI Characteristics
DMI is a moving average of range expansion over a given period (default 14). The positive directional movement indicator (+DMI) measures how strongly price moves upward; the negative directional movement indicator (DMI) measures how strongly price moves downward. The two lines reflect the respective strength of the bulls versus the bears. The +DMI generally moves in sync with price, which means that the +DMI rises when price rises, and it falls when price falls. It is important to note that the -DMI behaves in the opposite manner and moves counterdirectional to price. The -DMI rises when price falls, and it falls when price rises.

Source: TDAmeritrade Strategy Desk Figure 1: The +DMI and -DMI are shown as separate lines. There are several false crossovers ( Point 1) and one crossover at Point 2 that leads to an uptrend with +DMI dominant. Note: The calculations for DMI are complicated and are referenced elsewhere.

DMI Momentum
The relative strength of the DMI peaks tells the momentum of price and provides timely signals for trading decisions. When the buyers are stronger than the sellers, the +DMI peaks will be above 25 and the -DMI peaks will be below 25. This is seen in a strong uptrend. But when the sellers are stronger than the buyers, the -DMI peaks will be above 25 and the +DMI peaks will be below 25. In this case, the trend will be down.

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