Pathshala: (DMI) Directional Movement Index

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<span style="font-size: x-large;">Directional Movement Index (DMI)</span></h2>
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<b><span style="font-family: "Arial","sans-serif"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;">DEFINITION</span></b></div>
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<span style="font-family: "Arial","sans-serif";">Directional
Movement (DMI) is actually a collection of three separate indicators combined
into one. Directional Movement consists of the Average Directional Index (ADX),
Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI). ADX's
purposes is to define whether or not there is a trend present. It does not take
direction into account at all. The other two indicators (+DI and -DI) are used
to compliment the ADX. They serve the purpose of determining trend direction.
By combining all three, a technical analyst has a way of determining and
measuring a trend's strength as well as its direction.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHN7K-jIUaQRYo8JUZft_mk02dDYTnEstF9ylV5KD2ymPqcR7QoxwFw7IS_Aj017kv22M-FsrYdp_UZGLNKw8RFq0FHhb4SBlKknjnT29Ly8mwW1IcDh_Wo-xPWmL-XRHVmYUdgovqstA/s1600/DMI+Intro.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="502" data-original-width="1001" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHN7K-jIUaQRYo8JUZft_mk02dDYTnEstF9ylV5KD2ymPqcR7QoxwFw7IS_Aj017kv22M-FsrYdp_UZGLNKw8RFq0FHhb4SBlKknjnT29Ly8mwW1IcDh_Wo-xPWmL-XRHVmYUdgovqstA/s640/DMI+Intro.png" width="640" /></a></div>
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<b><span style="font-family: "Arial","sans-serif"; mso-fareast-font-family: "Times New Roman"; mso-font-kerning: 18.0pt;">CALCULATION</span></b></div>
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">Calculating
the DMI can actually be broken down into two parts. </span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">To
calculate the +DI and -DI you need to find the +DM and -DM (Directional Movement).
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">+DM
and -DM are calculated using the High, Low and Close for each period. </span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">Once
you have the current +DM and -DM calculated, the +DM and -DM lines can be </span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">Now
that -+DX and -DX have been calculated, the last step is calculating the ADX.</span></span></div>
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<span style="font-size: x-small;"><span style="font-family: "Arial","sans-serif";">ADX
= 100 times the Exponential Moving Average of the Absolute Value of (+DI - -DI)
/ (+DI + -DI)</span></span></div>
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<span class="mw-headline"><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;">THE
BASICS</span></span><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"></span></h1>
<span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">DMI has a
value between 0 and 100 and is used to measure the strength of the current trend.
+DI and -DI are then used to measure direction. When combined, the indicator
can provide some valuable insight. A general interpretation would be that
during a strong trend (ADX above 25 but dependent on the analyst's
interpretation), when the +DI is above the -DI, then a Bullish Market is
defined. When -DI is above +DI, then a Bearish Market is at hand. </span><br />

<span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">One thing to
be considered is that what DMI values determine, strength or a potential
signal, is up to the trader's interpretation. Acceptable values may change
depending on the financial instrument being examined, therefore some historical
analysis of the instrument in question would be prudent. A technical analyst
can make better decisions based on what has occurred in historical examples. </span><br />

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<span class="mw-headline"><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;">WHAT
TO LOOK FOR</span></span><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"></span></h1>
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<span id="Trend_Strength"><span class="mw-headline"><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt; line-height: 115%;">Trend Strength</span></span></span><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt; line-height: 115%;"></span></h2>
<span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Analyzing trend
strength is the most basic use for the DMI. To analyze trend strength, the
focus should be on the ADX line and not the +DI or -DI lines. Wilder believed
that a DMI reading above 25 indicated a strong trend, while a reading below 20
indicated a weak or non-existent trend. A reading between those two values,
would be considered indeterminable. However, as previously mentioned, an
experienced trader would not take the 25 and 20 values and apply them in every
situation. What is truly a strong trend or a weak trend depends on the
financial instrument being examined. Historical analysis can assist in
determining appropriate values. </span><br />
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<span style="font-family: Arial,Helvetica,sans-serif;">Also, keep in mind that Wilder developed the dmi for use with currencies and commodities which are typically more volatile
 than stocks and have stronger trends. This will factor into determining
 which values are appropriate not just for analyzing the strength of a 
trend, but also for any signals generated. </span></div>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span class="mw-headline" id="Crosses">Crosses</span></span></h3>
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</span><span style="font-family: Arial,Helvetica,sans-serif;">DI Crossovers are the significant trading signal generated by the DMI. There is a particular set of conditions for each cross. </span><br />
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<u><b><span style="font-family: Arial,Helvetica,sans-serif;">Bullish DI Cross</span></b></u>
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<li><span style="font-family: Arial,Helvetica,sans-serif;">ADX must be over 25 (strong trend. The value is determined by trader)</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">The +DI crosses above the -DI.</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Stop Loss should be set at the current day's low. The signal should 
not be abandoned, if the low is not breached, even if the -DI crosses 
above the +DI</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">The signal strengthens if ADX rises.</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">If ADX strengthens, trader's should employ a trailing stop.</span></li>
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<u><b>Bearish DI Cross</b></u>
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<li>ADX must be over 25 (strong trend. The value is determined by trader)</li>
<li>The -DI crosses above the +DI.</li>
<li>Stop Loss should be set at the current day's high. The signal should
 not be abandoned, if the high is not breached, even if the +DI crosses 
above the -DI</li>
<li>The signal strengthens if ADX rises.</li>
<li>If ADX strengthens, trader's should employ a trailing stop.</li>
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<span style="font-family: Arial,Helvetica,sans-serif;"><span class="mw-headline" id="SUMMARY">SUMMARY</span></span></h4>
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</span><span style="font-family: Arial,Helvetica,sans-serif;">Directional Movement (DMI) is another quite valuable technical analysis indicator provided by Wilder. It takes the very complex subject of trend strength
 and direction and calculates it down into a very simple and 
straightforward visual. The key takeaway of using the DMI is that even 
though it can provide quality information and even trading signals,
 it is not an easy indicator to master. To truly get the most out of 
DMI, a technical analyst will have to continually study and tweak their 
use of the indicator. Combining the knowledge of how DMI works and its 
capabilities, along with a decent amount of historical analysis and experience, will help the trader to make the DMI a good, possible addition to their overall trading strategy.
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(DMI) Directional Movement Index 25. (DMI) Directional Movement Index

Directional Movement Index (DMI) HISTORY J. Welles Wilder created the DMI and featured it in his book New Concepts in Techn...