Finishing DMI calculations
by Jim Summers, Ph.D.
Having completed the lengthiest formulas that J. Welles Wilder developed in his Directional
Movement Index (DMI) system, in this issue we'll complete the calculations for the basic DMI system.
Future enhancements to the system will illustrate the customization power of Lotus 1-2-3.
The formulas we've already developed calculate the daily true range and the amount of daily +/-
directional movement. Wilder calculates a 14-day moving average for each—the choice of 14 represents
his sense of an average half-cycle period for the contracts he trades. His experience showed that a 28-day
cycle prevailed. Most software uses 14 days as the default. Like those professional systems, we have the
freedom to change the default. Unfortunately, when Wilder published this system back in 1978 he was
using a calculator. This led him to take shortcuts in the calculations to avoid rekeying 14 days worth of
data each day. The standard moving sum or averaging procedure drops the most distant day or other time
period and adds the new day or time period to the series of numbers. Instead of dropping the most distant
value, Wilder divided the prior sum by 14, subtracted that number from the total, and then added the new
number. The formula for the 14-day sum of the Trading Range (TR14) reads:
Today's TR14 = Previous TR14 - (Previous TR14/14) + TR1
where the first TR14 = the sum of the first 14 TR1s, and TR1 = the most recent daily trading range.