Developed by J. Welles Wilder, the DMI indicator is a trend following indicator designed to determine first whether a currency pair is trending or non-trending before providing buy or sell signals in the direction of the trend.
Directional Movement Index ( DMI) consists of three components:
- ADX measures whether a currency pair is trending or not trending
- Current Positive Directional Index ( +DI)
- Current Negative Direction Index ( -DI)
ADX is used very often as a trend-confirming indicator in forex trending systems. As a general rule, if ADX >= 25, the trend is confirmed, either up or down.
ADX readings below 20 indicate sideways movement or a very weak trend, either up or down.
ADX readings at or above 25 indicate a trend, either up or down.
ADX readings above 40 indicate a strong trend, either up or down.
ADX readings above 80 are very rare and indicate an extremely strong trend, either up or down.
ADX can be very useful for the currency trader if combined with a trending system such as the MA Cross trending system
ADX = modified moving average of DX (ADX fluctuates between 0 and 100)
DX = 100[+DI - (-DI)]/ [+DI + (-DI)]
Popular Trading Signals from Directional Movement Index (DMI)
When +DI rises above -DI, it can generate a buy signal for a new up trend, similarly, if +DI crosses below -DI, it can generate a sell signal for a new downtrend.
Go Long when
+DI rises above the -DI
ADX should be >= 25
Exit the position when +DI crosses -DI from above or when ADX falls below 20.
Go Short when
-DI rises above the +DI
ADX should be >= 25
Exit the position when -DI crosses +DI from above or when ADX falls below 20.
Note: When ADX falls below 20 or both below +DI and -DI, this indicates a non-trending currency pair with low volatility (side ways movement).
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