The Directional Movement Index is one of Welles Wilder’s lesser-known creations, yet it is explained in his book New Concepts in Technical Trading Systems published in 1978. Many of the most common indicators in use today originate in this seminal book on technical trading. The ADX, RSI, Average True Range, the Parabolic SAR, and the Directional Movement Index all come from the same volume. If you have not read this book yet, it ought to be on your required reading list as it is really one of the classics in trading.
what is dmi in stocks? The Directional Movement Index (DMI) is a force indicator. It calculates the strength of the upward development or downward second and shows the outcomes as a trend strength line, also called the ADX. Yet, for the motivation behind this article, we will bar analyzing the ADX and speak strictly of the DMI. The indicator is recognizable by two distinct lines called the +DI and the – DI.
The + DI measures the upward pressing factor, or upward development or buying pressure (take your pick of which term you like) and the – DI measures the negative or downward development, or selling pressure. When the two lines cross it can be a buying signal if the + DI gets over the – DI, and conversely if the – D1 gets over the + DI is considered a selling signal. Wilder also theorized that when a hybrid takes place, it can be viewed as a trend reversal.
My experience with the DMI, which is extensive, would recommend that the hybrid points are not necessarily indicative of trend reversals. On the contrary, depending too heavily upon the DMI can cause you to be whipsawed in tightly congested markets. So I discount Welles Wilder’s theory on crossing points being indicative of trend reversals.
In non-trending markets the DMI can be confusing and cause many false purchase/sell signals. For that reason, I do not utilize the DMI in consolidating or congested markets. However, in trending markets the DMI can be quite helpful in identifying potential retracements, and when combined with Fibonacci retracements, can allow you to obtain a couple of extra points playing the retracements in a broader trend.
To Welles Wilder’s credit, he was aware of the whipsawing tendencies of the DMI and places a limitation upon its utilization. Wilder felt that you ought not initiate a long position until price has taken out the high posted on the day or the bar that the+ DMI crosses above them. This caveat will in general decrease the quantity of spurious hybrids the DMI can display, yet I’m still not comfortable using the DMI as a primary indicator in my fates trading. On the other hand, the DMI is a great backup indicator, especially since it is force based, to filter trades off of your primary indicator. This is the exact job I have implemented to utilize the DMI and have been pleased with the outcomes.