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How to Trade With the Directional Movement Index (DMI)

Quick summary of Directional Movement Index (DMI):

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.

How to Trade With the Directional Movement Index (DMI)

  • 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.

 

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About Dwipen Gogoi

Dwipen Gogoi, MBA (IB and IT) and PGDFT from Pune. (Technical Analyst of AliceBlue) I am a You Tuber, Blogger and doing Technical Analysis last 10 years in Stock, Commodity and Forex Market. i am creating various trading strategies for day traders, swing traders, scalp traders.

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