Wilder's Directional Movement Index System
by Jim Summers, Ph.D.
As I noted in the last issue, I need both a charting program and Lotus 1-2-3 to trade with discipline and
confidence, along with maintaining my emotional health. My first major programming task for Lotus
1-2-3 came about when I recognized the limits of charting software.
The first indicator we'll systemize is J. Welles Wilder Jr.'s Directional Movement Index (DMI). However,
only when we understand what the indicator is supposed to do does it make sense to test it or incorporate
it into our trading plans. Thus, actual Lotus 1-2-3 work will have to wait.
You may wonder why I chose Wilder's DMI. After all the DMI is available in nearly every technical
analysis package. The reasons for this choice are a good example of the value of scholarship.
Briefly described, the charted portion of the DMI system consists of three lines. The ADX, or average
directional movement index, is supposed to tell us if a trend is in effect or not. The other two lines—
+DI14 and -DI14, the up and down 14-day average of directional movement—are supposed to be issuing
buy or sell signals when they cross one another. Figure 1 illustrates the two DI lines on the December
1986 S&P 500 contract.