The Directional Movement Index, or DMI, is a trend based technical indicator. The idea behind DMI is to help avoid false breakouts. DMI is tracked over a standard of 14 periods. There is a very extensive formula for DMI but you don’t need to understand the formula in order to properly trade the DMI to your advantage.
DMI can range from 0 to 100 and there are three lines that you need to know. There is the +DI line and the -DI line. There is also the ADX, which is the Average Directional Movement Index, or the moving average of the DMI itself.
Understanding the DMI is very easy. The +DI line tracks when the price is going up. The -DI line tracks when the price is going down. The ADX shows the strength of the trend and lets you know if the specific DI line that is increasing has a strong trend behind it or weak.
Here’s what the DMI looks like on our chart:
Trading DMI is fairly simple. When the +DI line crosses above the -DI line it indicates a bullish period. In the chart below we see the +DI line cross up and over the -DI line and correlating that with the price of the stock we see a quick bullish run happening.
PRO TIP: To capture the most out of your trade it would be best to sell when the DI line crosses the ADX down. In the case above when the +DI line crossed the ADX down we would want to sell. We would be able to capture the most amount of gains by doing so.
Vice versa, if the +DI line crosses below the -DI line we see a bearish run:
I find that DMI works best on intra-day charts. Using the 15 minute chart the DMI can help you find good buy opportunities and even help you ride some momentum thats already happening by looking at the strength of the ADX. Let’s take a look at a chart that has weak trend strength and see how the ADX is important when determining entries:
As shown above whenever the ADX is weak or trending low we typically see sideways trading. Wait for the strength to increase before buying.
I find that pairing the DMI with the Money Flow Index (MFI) will yield excellent results. You can view more about this strategy here.
Overall, DMI is a great strategy that can be used for both day trading and swing trading. For swing trading I recommend waiting for the last hour of the day and then trying to catch a -/+ DI cross and ensure the strength of the ADX is increasing.
Let me know your thoughts on any of this by leaving a comment!
As always, good luck and happy trading!