Direction indicator or Directional Movement Index (abbreviated DMI) was created Wells Wilder. The main purpose of the indicator is to show the existence of trends and trend giving a signal to enter the market. Also on the basis of this indicator was created ADX , of which you may have already read on our site.
Direction indicator is composed of two lines with DMI-(negative line) and DMI + (positive line). Indicator also has a scale from 0 to 100, but it is very rare that a LED attained a mark of 100. Fluctuations often limited areas from 0 to 60, 80, depending on the strength of a trend. We have already mentioned that on the basis of this indicator was created ADX. If you look at the indicator ADX, we will see that it just added another line, which shows the strength of the trend.
Application of the DMI
The main signals for market entry are the intersections of the indicator lines. When the positive line crosses the negative bottom-up, it is a buy signal and vice versa - if negative intersects the positive line from top to bottom, this is a signal to sell. To buy signal is more effective it is necessary that the market was a long downward trend. But it should be noted that the low market volatility or sideways when minor price fluctuations, the indicator gives a lot of false alarms, since there is often crossing lines. But he clearly works when large fluctuations in the market price and the accuracy of the signals is high.
DMI minus. Component direction indicator, which is also present in the ADX indicator and is used to calculate the downward trend. The main signal, which indicates the beginning of a downward trend - a growth of DMI minus, in other words, this line starts to move in the opposite direction to the price chart.
DMI plus. The second line of the indicator, which moves almost in sync with the price chart. The strong growth of this line indicates a strong uptrend. Indicator DMI + is almost always the opposite indicator DMI-, and their divergence shows how strong the current trend or not (when lines often overlap).
This indicator is best used on the charts more halves and strong price movements. With lateral movement of the market should not to use directional movement indicator, as it will give a lot of false alarms, which can later lead to the loss of your funds. But all the same indicator is not bad and has proved worthy, so do not expunge it from his trading practices.