Education / Indicators / Directional Movement Index

The DMI, Directional Movement Index, is a trend following system. The average directional movement index, or ADX, determines the market trend. When used with the up and down directional indicator values, +DI and -DI, the DMI is an exact trading system.

The Directional Movement Index attempts to distinguish a market with significant trending and a market with only sideways movement. The DMI ranges between values of 0 and 100. The closer it is to 100, the stronger the trending characteristics of the market. The closer it is to 0, the stronger the sideways characteristics of the market.

The best application of DMI is present when used with another indicator. DMI should either confirm or contradict the indicator being used. It is also best to use DMI in long-term trade situations. Because the study is not as sensitive as other indicators it is appropriate to use it as a confirmation tool. When the DMI is advancing, the average is higher on the 0 to 100 scale, trend following systems are best employed. Likewise with a decreasing DMI average, the line is lower on the scale closer to 0, a counter trend system might be best. These traits represent the fact that as the average line goes higher in the scale the strength of the trend is gaining, and as the ADX goes lower the trend is loosing strength. It is also important to look at the individual lines for changes in price movement.