Due to directional signals being misleading due to price being able to swing in both directions, reading the signals can be hard. The DMI ties in with the ADX as it is simply a moving average of the DMI. With a score ranging from 0 to 100, the objective for a technical trader is to read which direction the price is moving which can be difficult as price can swing either way and can change depending on low or high volatility.
The defaulted range determined by the DMI is usually a 14 day period with the positive Directional movement indicator (+DMI) calculating the strength of the price moving in an upward direction and the negative directional movement indicator (-DMI) reflecting how strongly the price is moving down. Both DMI’s are shown with their own separate lines which show the bullish versus bearish markets. When a crossover occurs between the two lines (-DMI and +DMI) some traders will take this as a sign to either go long or short. However, when volatility is high, most will use other indicators to double-confirm their entry and exit signals.
Therefore on a whole it is best to just look at crossovers are your first sign that a direction change could potentially occur. Calculating the DMI is fairly complex, especially to a novice trader, and consists of 3 key lines:
- +DI (current positive directional index): highs divided by the price range over the last day and previous close, smoothed over a given number of periods.
- –DI (current negative directional index): the range of lows divided by the price range over the last day and previous close, smoothed over a given number of periods.
- ADX : modified moving average of the difference of +DI and -DI divided by the sum of +DI and -DI, multiplied by 100.