Directional Indicator

The directional movement index was developed by J. Welles Wilder for identifying whether a market is in trend mode. In other words, the DMI helps identify whether there is a definable trend in a market, and in which direction that trend is moving.

Formula:

Wilder defines +DI as the percentage of the true range that is up. -DI is the percentage of the true range that is down. According to Wilder, when the +DI value is greater than the -DI, a long position is indicated. Conversely, when the -DI is greater than +DI, a short position is indicated. The DMI can be used alone or with the Average Directional Movement Index (ADX). For more information on ADX, see Average Directional Movement Index.

Parameters

Parameter

Function

Color

Default color for -DI is yellow; default color for +DI is green. To change the color, click on the color button:

Then choose the color you want from the Color Menu.

Graph

Sets the drawing method for the study.

Option	Function
Bars	Renders the study as bars.
Dots	Renders the study as dots.
Dotted	Renders the study as dots.
Histogram	Renders the study as a histogram drawn from 0.
Line (Default)	Renders the study as a line.
Not Drawn	The study is not rendered.

Line Style

Sets the rendering technique of the graph parameter (if it is set to Line).

Option	Function
Dash-Dot	--l-l-l-l-l-l-
Dash-Dot-Dot	----ll----ll----
Dashed	- - - - - - - - - - - - - - -
Dotted	llllllllll
Solid (Default)	-------------------------

Line Width

Sets the tickness of the study line.

Option	Function
1 pixel (Default)
2 pixels
3 pixels
4 pixels
5 pixels

Period

Default is 14

Notes

The Directional Indicator is traditionally assessed beside the Average Directional Index (ADX). The Directional Indicator and ADX compliment each other in a remarkable way.

The Directional Indicator's +DI value represents a market's bullish force, and its -DI value represents a market's bearish force.

Directional Indicator signals are generated when +DI crosses -DI, or vice versa (the higher value being the dominant force). Caution should be given to literal application of this principle, for whipsaw activity is common in non-trending markets. A bullish signal occurs when +DI moves above -DI, and a bearish signal occurs when -DI moves above the +DI. +DI/-DI crosses should be confirmed by other indicators.

J. Welles Wilder Jr. confirmed this study with the ADX , which identifies trend strength. The ADX combines +DI and -DI values and then smoothes the lot in a moving average. The result is trend strength (regardless of trend direction). Generally, ADX readings above 40 indicate a strong trend while readings below 20 indicate a weak trend.

see, J. Welles Wilder Jr., New Concepts in Technical Trading Systems, McLeansville, NC: Trend Research, 1978, pp. 35-52.