Directional Movement System (DMS) is composed of 3 indicators:
Negative directional indicator (DI-). Where (D-) component of average directional index (ADX). If DI- is sloping forward, it is signal that downtrend is increasing.
Positive directional indicator (DI+). Positive directional indicator (DI+) also component of average directional index (ADX). If DI+ is sloping upward, it is signal that uptrend is increasing.
Average directional index (ADX): Average Directional Index (ADX) was created by J. Welles Wilder as indicator of trend strength.
- Directional Movement shows whether downside or upside movement is stronger
- It is calculated by comparing the current price with the previous price range
- When the red line is above the green line, it means the price is dropping
- When the green line is above the red line, it means the price is rising.
- If the -DI and +DI are crossing back and forth, there likely isn’t a price trend going on, and the price is moving sideways.
- ADX is a third line on the indicator, and it shows the strength of the trend.
- Buy alerts are signaled when the +DI lines crosses the –DI line from below
- sell signals are given when the –DI crosses the +DI line from below
- The strength of the signals provided by the intersections of +DI and –DI can be obtained from the ADX line
- Higher readings of the ADX (in general above 25) confirm a firm trend giving confidence to the +DI/-DI crossovers,
- Readings below 20 imply that the trend is weak and that users may wish to ignore the +DI/-DI crossing.