Directional Movement Index (DMI) Technical Indicator

Forex participants who qualify themselves as trend traders aim to enter a trade in the direction of the currency trend. One of the tools technical traders use in order to determine their trend trading strategies, is the Directional Movement Index (DMI).

Directional Movement Index (DMI) Basics

DMI, also known as directional movement indicator, is a useful tool for identifying the presence of a definable trend and assessing its strength. A line scaled from 0 to 100% is used for the purpose of rating the directional movement of a price. The higher the value of the DMI is, the stronger the signal for a trend. On the other hand, the lower this value is, the less the potential for a trending price movement.

Two lines are needed that reflect the buying and selling pressure in the drawing of a DMI indicator chart. The positive directional indicator, marked as +DI, measures how strong the price movement in an upward trend is, whereas the negative directional indicator is marked as -DI and measures how strong the price movement in a downward trend is.

The first thing to look for when examining the DMI lines is which of the two is higher. Some trend traders refer to line on top as the dominant DMI line and consider it stronger and more likely to forecast the trend direction. It is regarded that bullish market conditions are experienced when the -DI is lower than the +DI. The vice versa is true for bearish market conditions.

Average Directional Movement Index (ADX)

The average directional movement index (ADX) represents a moving average of the DMI. The ADX is constructed by the use of the direction indicators +DI and -DI and is used in order to determine the strength of the trend.

The ADX is measured on a scale between 0 and 100. If the value of ADX is below 20, then it is considered that there is no clear trend on the forex market. However, if the value starts to move above 20, then this movement is a warning signal about the beginning of the formation of a trend. Readings over 40 indicate a strong trend. The trend has been exhausted when the value of the ADX has been above 40 but starts to move down.

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