What is the Directional Movement Index and how to use it?
The Directional Movement Index confirms signals from other instruments. It can track the starting point and direction of a trend and help identify reversal points.
The DMI is an oscillator based on two curves. The indicator can be found below the price chart.
The index contains the following elements:
1. +DI (Positive Directional Indicator). It indicates an upward trend and reflects its strength.
2. -DI (Negative Directional Indicator). Reflects a downward trend.
The DMI is the base for calculating the ADX – Average Directional Index. In some sources, DMI and ADX are combined into one indicator of trend strength. The main difference is that the ADX has an additional average index line, which strengthens the evaluation of the trend.
How to use the tool
One of the advantages of the index is its interpretation. The starting point is the crossing of the lines. Whichever line is rising indicates where the market is heading:
– if the +DI rises, an upward trend is probable;
– if the -DI is rising, a downward trend is likely.
It is also necessary to look at the height of the lines compared to previous levels. If it rises much higher than previous peaks, then the end of the trend should be expected.
Advantages and disadvantages
Like any other tool, the DMI has advantages and disadvantages. An optimal trading system can compensate for some of the disadvantages.
Index’s pros:
– simple interpretation of signals, such as the position of lines, direction or distance between them;
– screening out false signals, which is particularly important in flat weather;
– flexibility in using other indicators to complement it;
– versatility of use for different installations.
Despite the pros, DMI has some cons, among which are:
– it is not compatible with short-term timeframes as it gives false signals;
– signals can be delayed, which affects the efficiency of the activity;
– is only suitable for use in trending markets;
– serves only as an additional tool to reinforce the signals of other indicators.
The tool is compatible with standard trend indicators. These are mainly moving averages and alligators. With the help of the DMI, you can confirm this or the result of other indices.
Traders also use indicator in conjunction with reversal patterns to indicate a change in trend. DMI confirm signals from resistance levels and trend lines.
Aroon indicator is suitable for similar applications. It differs from the DMI in how it operates. In addition, the DMI has smoother lines, which may be preferable in certain conditions.
