Directional movement index – DMI
The index is developed by J. Welles Wilder, Jr.
Characteristics
The indicator spots the trend and its strength, as well as points at the possible price reversals. The scale from 0 to 100% is used to measure the trend. The positive line is defined on the basis of the positive DM, though the negative is shown on the basis of the negative DM. The third line is ADX.
Trading signals
Buy signal is received when the positive line is higher than the negative, sell signal - when positive line is lower.
DMI works, when the trend is observed, and ADX is growing. That is why the best signal to buy is when the ADX crosses the positive line and rises, and the positive line is higher than the negative one.
The most favourable signal for selling is when the ADX crosses the negative line and goes upwards, and the negative line is dominating.
When the ADX subsides, the market looses directed, and DMI trading does not work.
Advantages
It is a good instrument for detecting the long-term tendencies.
Disadvantages
It has low sensitivity to the short-term price changes. It is advised not to use the indicator independently, but only as a confirming filter together with other trend following systems.
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