Tips on Technicals - Directional Movement Index
Indicator type: |
Trend finder |
Used to: |
Determine if a market is in a trending mode |
Markets: |
All cash and futures, not options |
Works Best: |
All markets and time frames |
Formula: |
1) Directional Movement (DM) is defined as the largest part of the current period's price range that lies outside the previous period's price range.
PDM = current high minus the previous high (called plus DM)
MDM = current low minus the previous low (called minus DM)
If PDM > MDM then MDM is set to zero
If MDM > PDM then PDM is set to zero
If the current range lies within or is equal to the previous range then both PDM and MDM are set to zero |
Calculate the value of the Plus and Minus Directional Indicators: |
PDI(n) -> = PDM(n) * 100 |
MDI(n) -> = MDM(n) * 100 |
|
ATR(n) |
|
ATR(n) |
Where: |
n = |
Number of periods |
|
ATR = |
Average True Range |
Calculate the absolute value of the Directional Movement Index (DMI): |
DMI = |
(PDI - MDI) (PDI + MDI) |
|
Parameters: |
Creator Welles Wilder recommended a 10 day interval |
Theory: |
The Directional Movement Index (DMI) is a filtered momentum indicator that is used to determine if the market is in a trending mode. It provides an indication of how much directional movement (trend) is present in each market and provides a way to compare trends in different markets. |
Interpretation: |
The Directional Movement Index is most often used as a part of the whole Directional Movement System. The System takes a moving average of the Index and looks for values above 20-30 as indicating a market in a trending mode. |

The Directional Movement Index was used above with a trend following system; a single moving average crossover. The theory for the system says that the market should be bought when price crosses above the average and sold when it crosses below. This would cause numerous false signals (whipsaws) during flat market periods. By using DMI to determine if the moving average system should be used, the flat period (A) would not have been traded (DMI below 30).
The long rally (B) showed a very high DMI (strong trend) that fell below 30 in early June. At that time, the long position would have been closed. The market then traded flat for a while and no position would be taken until DMI indicated a trend. Since confirmation of indicators is important, the small DMI rises above 30 in June would be ignored. The market was in a trading range and the longer-term rising trend line (not shown) was still intact.