The Directional Movement Index, a Tool that Forex Traders Use to Determine Trend Strength
When trying to determine price strength and direction many turn to the Directional Movement Index (DMI) for guidance. As a forex trader, the DMI should be used to help determine when it is appropriate to trade a currency pair short or long.
The DMI was invented by Welles Wilde in 1978. Wild is the same person responsible for inventing the Relative Strength Index. A key feature of the Directional Movement Index is the fact that it has the ability to determine if a trend is strong or weak.
Ergo, you as a forex trader should employ the DMI as part of your trading strategy that you are creating to support you in establishing and entering the strongest trends.
The DMI can be used in a variety of markets, making it a versatile tool for commodities, futures, stocks and Forex. It can also be used with any time frame and any currency pair.
DMI Defined
The DMI is a termed a moving average. It allows you to pick the time frame setting to use. It also has a default setting of 14. The Directional Movement Index is comprised of two different signals: the (-DMI) which is the negative directional movement indicator and the (+DMI) positive directional movement indicator.
The (+DMI) indicates the strength of the rising price movements while the (-DMI) denotes the strength of the falling price movements. Success with the Directional Movement Index will be determined by how well the user understands the two signals the relationship they have to one another.
When charted, each indicator is typified by a separate line. Important to note, that one is always at the top. The indicator that is on top is called the dominant Directional Movement Indicator and it will set the price. When the two indicators crossover the buyer and seller dominance is altered.
The performance of the DMI is not completely reliable in determining success; this is true with any technical indicator. Should you find that there is a crossover it is very important that you use a second source to confirm the crossover before jumping in.
The Directional Movement Index can generate delayed signals frequently when the volatility is very high and when the volatility is very low it generates low quality signals. These factors have made experts agree that a crossover should simply be an indication that something is happening.
The DMI is an excellent guide to help you determine ranging and trending markets providing you learn how to interpret the relationship between the negative and positive directional indicators.
Learn more about the Directional Movement Index by visiting Rudolf Boquiren’s website on Forex Trading System development.
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Filed under: Currency-Trading
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