Directional Movement Index - DMI

The Directional Movement Index (DMI) was designed by Welles Wilder and is an effective and frequently used trend indicator. The main use of this tool is to show the strength of a trend and it also indicates possible price reversals.

Interpretation
DMI plotted as 3 lines on the scale of 0 to 100, DI+ shows the amount of positive movement, DI- shows the amount of negative movement and the ADX is the average difference of these 2 lines.

ADX readings below 20 indicate a weak trend or a ranging market and readings above 40 indicate a strong trend. Note that ADX does not indicate direction but just the strength of the trend, either up or down.

In general, there are 2 buy and sell signals generated by DMI. A buy signal is given when DI+ crosses above the DI- line, this shows that the positive price movement is greater than the negative. A sell signal is given when DI- crosses above the DI+ line, this show the negative price movement is overtaking the positive.

I have list of stocks that I scan for DMI's DI+ and DI- line crossover and I will post the results here everyday to ease your scanning and investment process. --> Here

Signals given by DMI:

DI lines crossover
As discussed above.

ADX line
ADX can be used to look for reversals as suggested by Wilder, the ADX should be above or below both DMI lines depends on the signal looking for as following:

For sell: look for DI+ greater than DI- and ADX below both DMIs
For buy: look for DI- greater than DI+ and ADX above both DMIs

Extreme Point Rule
It is a refinement rule developed by Wilder to take care of short term whipsaws or breakouts. Extreme point is the high or low for the day when the crossover occurs and it's used as a actual buy or sell signal. For example, it the price once again rises above the Extreme Point level you have a buy signal else you should stand aside. The following illustrate the Extreme point Rule

- On 1st Sept, Stock X's DI+ crossed above DI-
- The highest of the day is USD55.00 (Extreme Point)
- For the next 3 days the price fails to rise above the Extreme Point.
- On the 5th Sept, the price rises above USD55.00 hence a buy signal is given.