Directional Movement Index trading indicator

Directional Movement Index (DMI) – an indicator developed by J. Welles Wilder in 1978 that identifies in which direction the price of an asset is moving.

Formula:

+DI = (Smoothed +DM/ ATR) × 100
-DI = (Smoothed -DM/ ATR) × 100
DX = (|+DI - -DI| / |+DI + -DI|) × 100

where:
+DM (Directional Movement) = Current High - Previous high
-DM = Previous Low - Current Low
Smoothed +/-DM = ∑t=1^14 DM - (14 ∑t=1^14 DM)/ 14 + CDM
CDM = Current DM
ATR = Average True Range

Key takeaways:

1. The DMI measures both the strength and direction of a price movement.
2. Crossovers between the +DI and -DI lines are used as trade signals.
3. ADX measures the strength of the trend. A reading above 25 indicates a strong trend.

Counterarguments:

1. Crossovers may produce false signals as a trend may not necessarily develop after entry.
2. Crisscrossing of the +DI and -DI lines may occur without a clear trend, leading to multiple signals but no definitive trend direction.