The directional movement index (or DMI) was developed by J. Welles Wilder in order to determine the overall direction of a given asset’s prices. DMI is composed of two lines, one representing positive direction (+DI) and one representing a negative direction (-DI).
To calculate the DMI, a trader first calculates the difference between the current high and the previous high (HiDiff), as well as the difference between the previous low and the current low (LowDiff). HiDiff and LowDiff are then compared. If HiDiff is greater in value, a variable +DMI is set to HiDiff and a variable -DMI is set to 0. If LowDiff is greater, -DMI is set to LowDiff and +DMI is set to 0. If the two values are equal, or if no trend is seen in either highs or lows, both values are set to 0. A calculation known as the Welles Summation is then performed on both +DMI and -DMI, resulting in two numbers: +DI and -DI, both ranging from 0 to 100. The directional movement index consists of these two points.
The DMI can be used in strongly trending markets to determine strong buy and sell signals. The DMI generates a strong buy signal when +DI crosses above -DI at any point and generates a strong sell signal when +DI crosses below -DI at any point. In non-trending markets, this indicator becomes less useful.
The directional movement index is the basic value from which the average directional index (or ADX) is derived.
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