Directional Movement Index

DMI (Directional Movement Index)

Directional Moving Index (DMI) is developed by J. Welles Wilder Jr. at 1978. DMI is a trend-following indicator that designed to determine whether a share is in a trending or non-trending market. DMI is used to capture the period when the market shows significant trending or directional behaviour.

DMI consists of three lines, there are +DI line, -DI line and ADX line :-

+DI : current positive directional index, the range of highs divided by the price range over the last day and previous close, smoothed over a given number of periods. (Green line)

-DI : current negative directional index, the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods. (Red line)

ADX : modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100. (Yellow line)

Construction of the DMI:

TR (True Range) = The largest range from today’s High to low, today’s High to yesterday’s close, or today’s low to yesterdays close.

ADX = 14 Moving Average of DX.

+DI > -DI ADX moving up.	Strong Bull trend	-DI > +DI ADX moving up.	Strong Bear trend
+DI > -DI ADX moving down	Weak Bull trend	-DI > +DI ADX moving down	Weak Bear Trend
+DI > -DI ADX flat	Signal unclear	-DI > +DI ADX flat	Signal unclear

Example shown here is a KLCI weekly chart. As indicated, when the -DII cross above the + DI, a Bear Market signal is issue, then confirm with ADX. If ADX is moving higher, it suggests that the direction of the market is strong. If ADX is moving lower or flat, it suggest that the market direction is weak or unclear.