What is Directional Movement Index ?
What are the Different Types of Directional Movement Index?
What does the Directional Movement Index Say ?
What Timeframe to use the Directional Movement Index?
What Market Conditions does Directional Movement Index work Best In?
What Indicators Combine well with Directional Movement Index ?
Which is the Most Common Way to Trade with the Directional Movement Index?
How do you use the Directional Movement Index?
The rules that apply to using the DI are simple. Whenever the +DI crosses over the -DI you establish a long position. You reverse that position, liquidate the long position and set a short position when the -DI crosses over the +DI position. You also have to follow the extreme point rule, in addition to the crossover rules, using the drastic price as the reverse point, when a crossover happens. Use the High made during the crossover trading interval for a short position.
Conversely, reverse a long gap with the low made during the crossover’s trading time. For the business entrance or exit level, you retain the reverse point, the high or low, even though the +DI and the -DI stay crossed for multiple exchange periods. It will keep you from being whipsawed into the market.
To certain traders the ADX’s most significant application is the idea of the turning point. Firstly, the adx must be above all lines of di. The sector also reverses the current trend when the adx is turning lower. The adx acts as a warning to change course for the sector. A solid bull market during a blow-off period is the primary exception to this law. The ADX then turns lower a few days later to become stronger.
According to DI creator, if the ADX is below all DI lines you can avoid using some trend-following method. The market has no discernible pattern in a choppy sidewise band. .
How does the Directional Signal of the Directional Movement Index work?
DMI is used to verify demand behaviour. The +DMI largely works hand in hand with price meaning the +DMI will rise when price increases, and fall when price falls. It is significant to note that the -DMI is acting the opposite way and is moving counter-directional to price. The -DMI increases when prices fall, and it drops when prices rise. It takes a little bit to get used to this.
Just remember that, in the respective DMI line, the strength of a price move up or down is always recorded by a peak. It is easy to sound out directional signals. If the +DMI is dominant and increasing, the course of prices is up. If the -DMI is dominant and rising, the course of the prices is down. Yet demand power still has to be taken into account.
DMI tolerance ranges from a low of 0 to a high of 100. The higher the magnitude of the DMI, the greater the change in rates. The dmi values in excess of 25 mean price are directionally high. Dmi values are directionally poor below 25 mean level. .
What are the Limitations of the Directional Movement Index?
Take notice of the disparity between a regular moving average and an exponential moving average, there is a significant gap so far that it significantly affects the trading decision.
1. Simple moving average takes the cumulative price of the number of periods that you determine and splits by the number of periods that you set.
2. The exponential moving average has more bias and %weight against the few recent candlesticks when it comes to splitting the price across given intervals. The moving average metric helped me a lot and I was having a win rate of 60% regularly and when I say win rate I don’t mean income.
Adx tests pattern intensity. In a heavy trend shift, this indicator increases regardless of whether the trend movement is upside-down or downwards, whereas a non-trend movement results in lower reading on ADX. Directional motion is characterized by +DI and -DI.
In general, when +DI is greater than -DI, the bulls have the edge whereas the bears have the edge when -DI is larger. For a complete trading system, crosses of those directional indicators can be combined with ADX. .