What is Directional Movement Index? Learn about DMI

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Directional Movement Index là gì? Tìm hiểu về DMI
What is Directional Movement Index? Learn about DMI

Directional Movement Index (DMI) is an important part of the technical analysis system developed by J. Welles Wilder, which is prominent in measuring the strength and direction of market trends.

It is a popular tool in analyzing financial markets, including stocks, currencies, and commodities.

Here is a detailed look at the structure, calculations, and uses of DMI in trading.

Components of DMI

DMI consists of three main components:

  • +DI (Plus Directional Indicator) :
    • Indicates the strength of the uptrend.
    • Calculated based on the distance between today's high and the previous day's high, as long as the high is greater than the difference in the low price range.
  • -DI (Minus Directional Indicator) :
    • Indicates the strength of the downtrend.
    • Calculated based on the distance between today's low and the previous day's low, as long as the low is greater than the difference in the high price range.
  • ADX (Average Directional Index) :
    • Trend strength indicator, not direction.
    • Calculated by smoothing the values ​​of +DI and -DI.

How to Calculate

  • +DI and -DI are calculated based on the true range value and directional movement value over a given period of time, usually 14 days.
  • ADX is then calculated from the combination of +DI and -DI to represent the overall strength of the trend.

Using DMI in Trading

Identify Trends :

  • If +DI is above -DI, ​​the market is in an uptrend.
  • If -DI is above +DI, the market is in a downtrend.

Trend Strength with ADX

  • ADX above 25 usually indicates a strong trend. Below 20 may indicate a weak trend or a sideways market.
  • ADX does not indicate direction but only indicates the strength of the trend. Therefore, it should be XEM in combination with +DI and -DI.

Trading Signals

  • Buy when +DI crosses up and above -DI while ADX is rising above 20-25.
  • Sell ​​when -DI crosses up and above +DI while ADX is also rising.

Filter Market Noise

    • DMI can be used to filter out noise when the market is not moving clearly, especially useful when combined with indicators such as RSI or MACD.

Notes When Using DMI

  • Indicator Lag : As with many other technical indicators, the DMI can have a lag, especially when the market changes suddenly.
  • Combine With Other Strategies : DMI should be used in conjunction with other technical analysis methods to increase accuracy.
  • Market Psychology Research : Understanding market dynamics and volatility can improve the use of DMI.

Directional Movement Index is a useful technical analysis tool that helps traders determine the trend and strength of price movements.

By combining this indicator with other tools and understanding the market mechanics, traders can improve their decision-making and optimize their trading strategies.

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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
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