The Directional Movement Index (DMI) is way to project an asset’s price movement by combining a handful of individual metrics, often for the sake of technical analysis in market trading. Using historical price movements and current circumstances, investors may use the DMI to estimate the direction and strength of an asset’s price. While it may provide some context for advanced traders, the DMI is not risk free. Here’s what you need to know.
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DMI Components
The DMI works by comparing an asset’s high, low and closing prices. The two major components are the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). The average directional index (ADX) compares the two.
+DI
The +DI measures an asset’s current high price against its previous high over a specified period of time. This shows the upward pressure (if any) on the asset. If the current high exceeds the previous high, it indicates a positive trend. If the current high is less than the previous high, then there is no upward movement and the +DI is 0.
-DI
The -DI measures an asset’s current low price against its previous low. This shows the downward pressure (if any) in the asset. If the current low dips below the previous low, it indicates a negative trend. If the current low is higher than the previous low, then there is no downward movement and the -DI is 0.
ADX
Finally, the ADX compares the positive and negative directional indicators over time, typically over 14 periods. This shows the strength of any given movement, indicating whether the data suggests a significant trend or a “ranging” market.
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Using DMI Indicators
On a technical chart, the DMI will typically appear below the asset’s price information. This graph will include lines for the +DI in green, the -DI in red, and the ADX in black.
To use the DMI, compare the +DI line against the -DI line. For any period where the +DI is higher than the -DI, it indicates upward pressure on the price. This tends to indicate a buying signal. For any period where the -DI is higher than the +DI, it indicates downward pressure on the price. This tends to indicate a selling signal.
Anywhere that the two lines cross shows a change in the asset’s momentum.
Then, the ADX indicates the strength of the asset’s movement. It is a neutral value that indicates the correlation between current highs/lows and previous highs/lows. A high ADX indicates a strong relationship between past and present data, suggesting that the current price pressure is a trend likely to continue. A low ADX indicates a weak relationship between past and present data, suggesting that there’s no reason to think the current price pressures will continue.
Traders typically consider any ADX value above 25 to represent a strong trend, and any value below 20 to represent no significant trend. Between 20 and 25 suggests a market with extant, but potentially weak, relationships. This does not mean that a low ADX represents low volatility. It simply suggests that the market is not trending in a consistent direction.
Together, investors use these indicators to make trading decisions. When the +DI exceeds the -DI, and the ADX is above 25, it suggests a strong trend toward higher prices. When the -DI exceeds the +DI, and the ADX is above 25, it suggests a strong trend toward lower prices. In all cases, when the ADX is low, it suggests that current prices do not strongly indicate future performance.
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Calculating DMI Indicators
Directional Movement Index indicators can rely on a complex series of calculations, and the full calculus exceeds the scope of this article.
In broad strokes, to calculate the +DI and -DI, you start with calculating each day’s Directional Movement (DM). You cannot have a +DM and a -DM on the same day. Instead, for each day, there will be a (+DM/-DM) value of either (+DM/0) or (0/-DM).
For any given day:
- +DM exists if: Current High – Previous High > Previous Low – Current Low
- +DM = the absolute value of (Current High – Previous High)
- -DM exists if: Current High – Previous High < Previous Low – Current Low
- -DM = the absolute value of (Previous Low – Current Low)
From there, you will calculate each day’s +DI and -DI based on the moving historic values of the asset’s Directional Movement and its strongest price changes. This will give you a +DI/-DI for each day, even though for any given day one DM value will be zero.
You then calculate a Directional Index (DX). This is based on each given day’s positive and negative Directional Indicators. The greater the difference between an asset’s directional indicators, typically larger the DX. Then, the ADX is based on the historic average of the Directional Index.
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The Bottom Line
The Directional Movement Index is used to detect potential upward pressure on an asset’s price — or the downward pressure — and the strength of this movement. Investors use it to tell which direction an asset is moving and whether that movement is likely to continue.
Technical Trading Tips
- Technical indicators may help guide market trading. While they’re not foolproof, they may offer context and identify patterns within the market.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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