V.4:2 (77-80): Optimizing directional movement with cycles by John F. Ehlers

Optimizing directional movement with cycles by John F. Ehlers

Directional Movement, an approach which weighs the daily difference between highs and the difference between lows, can be optimized by applying cycle concepts. Ehlers explains the process and includes a BASIC computer program which features the optimized Directional Trend Indicator.

Directional Movement is a technical analysis approach that weighs the daily difference between highs and the difference between lows. The principle of this approach is that the larger difference will influence the directional movement of the price. Welles Wilder was so enthusiastic about the approach that he begins Section IV of his book New Concepts in Technical Trading Systems with "Directional movement is the most fascinating concept I have studied."

While the approach isn't all that bad, I am a little more reserved in my assessment of it than Mr. Wilder. Since I am oriented toward the use of cycles, I immediately question why a 14-day averaging process is used not once, but twice in the calculation of his Directional Index. This article approaches Directional Movement from the perspective that there is perhaps an adaptive process to improve the indicator.

In the sections that follow, we briefly review Directional Movement in its classic form, review a few principles regarding cycles, and derive an optimized Directional Trend Indicator (DTI) when cycles are present in the data. An interactive computer program listing is given to allow you to experiment with the limitations of the optimized DTI and perhaps apply it to your trading system.