Directional Movement Index Technical Indicator
Posted by Edward Dy on July 4th, 2008
Photo credit doblece
The directional movement index (or DMI) is a technical analysis tool developed by J. Welles Wilder for the purpose of finding the general direction of a particular asset’s prices. DMI is made up of a couple of lines, the positive direction (+DI) line and the negative direction (-DI) line.
To solve for the DMI, one must calculate first the difference between the current high and the former high (HiDiff), this should also include the difference between the former low and the present low (LowDiff). Next we should compare HiDiff and LowDiff.
If HiDiff’s value is greater, a variable +DMI is set to HiDiff while that of -DMI is set to 0. If LowDiff is larger, -DMI is set to LowDiff and +DMI, to 0. If the two are of equal values, or if no trend can be seen in either highs or lows, the values of both variables are simply assigned a 0.
Next we will utilize a calculation method known as the Welles Summation. This is calculation is done on both +DMI and -DMI. This will produce two values represented by +DI and -DI, both ranging from 0 to 100. These two points then make up the directional movement index.
The DMI can be utilized in strongly trending markets to find out the strength of the buy and sell signals. The DMI will produce a strong buy signal when +DI surges above -DI at any point. Conversely, it generates a strong sell signal when +DI falls beneath -DI at any point. This indicator becomes less useful however In non-trending markets.
The DMI is the basis for the average directional index (ADX).
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