Identify The Start Of A Trend With DMI by BC Low, CMT
Improve on certain directional movement index signals such as identifying
the start of a trending move and picking market tops and bottoms.
Directional movement index (DMI) is a long-accepted and popular technical indicator created by J. Welles Wilder to establish the existence of a trend in a market using three lines — ADX, +DI, and ‑DI. This article shows that the same three lines can be used to significantly improve on certain DMI signals to identify the start of a trending move and to pick market tops and bottoms. The new variations in this article feature clusters of three ADX lines, three +DI lines, and three ‑DI lines instead of the original three lines.
DIRECTIONAL MOVEMENT INDEX
ADX signal: Average directional movement index (ADX) signals a trending market when the ADX (14 periods) is above level 20 and rising. But ADX itself does not indicate whether the market is trending up or down. That signal is provided by +DI and ‑DI.
After ADX has risen to the 50 level and turns down, its decline represents a retracement. If there was an uptrend previously, then the declining ADX signals a correction down. If there was a downtrend previously, then the declining ADX signals a correction up.
When ADX declines to below 20 again, the market is nontrending until it rises above 20. Then the market trends again (Figure 1).