"Start trading like a pro! I created X_DEV so you could easily master entries and exits. TRY IT FREE! Click below!" ~Myst~
| INTRADAY | QQQ | SUP & RES | |
| CONSULTANT | LEVEL2 | X_DEV | PRIMARY |
| MYSTPORT | LIBRARY | TOOLS | ALL MSGS |
|
"Start trading like a pro! I created X_DEV so you could easily master entries and exits. TRY IT FREE! Click below!" ~Myst~ |
||||||||||||
|
|
DMI
| Subject: Directional Movement |
Written by: Mystifier |
August 1st,1999 |
The Directional Movement indicator ranks as one of my favorites. It is probably the best trend following indicator in technical analysis. It helps traders identify trends and tells them whether or not its moving quickly enough to be worth a long or short play. It also helps traders grab a significant portion out of the middle of important trends.
Interpretation
The Directional Movement system is composed of 3 lines. The +DI (positive directional indicator line), the -DI (negative directional line) and the ADX (average directional indicator line). The math for the calculation of DMI is complicated and best performed by a computer, but its worth noting that usually the DI lines are smoothed by a 13 period moving average. (The lines themselves are not 13 period moving averages). The mechanics of DMI checks whether today's range of a particular stock's movement is above or below the previous day's range and averages that information over a period of time.
Below is a chart of the Nasdaq Composite Index with the Dimensional Movement indicator drawn in at the bottom.
Trading Rules
-Trade only from the long side when the +DI is above the -DI.
-Trade only from the short side when the -DI is above the +DI
-The best time to buy is when the +DI and the ADX are above the -DI and ADX is rising. This shows the uptrend is getting stronger. Go long and place a protective stop below the latest minor low. (Look on the chart at the beginning of May 2003).
-The best time to short is when the -DI and the ADX are above the +DI and ADX is rising. This shows the bears are getting stronger. Go short and place a protective stop above the latest minor high. (Look above at May 2002).
-When the ADX declines it shows the stock or market is becoming less directional and a sideways channeling motion is usually the result, and it's best not to use a trend following method. (Look at the late 2003 to early 2004 period above).
-When ADX falls below both Directional lines it indicates a flat, low volatility market. Don't use a trend following method but watch closely because usually major moves occure once the ADX wakes up from the lull. The longer it stays below the DI lines the stronger the base for the next move. If the ADX begins to move up from below the lines and the +DI is on top, go long..........it indicates a new uptrend is beginning. If the -DI is on top, go short......its a tell that a new downtrend is beginning.
-When the ADX rallies above both DI lines it shows the market is overheated. When the ADX turns down from above both DI lines, its a tell that the major trend is weakening and a reversal is likely. (See the chart above in late 2002)
Technical indicators give hard and soft signals. For example, a violation of a price low or a change in direction of a moving average are hard signals. A downturn of the ADX is a soft signal. Once you see ADX turning down you have to be wary about adding to positions, and start thinking about taking profits or tightening stop loss targets.
Mystifier
Copyright August 1st 1999
Some books on the subject are listed below:
|
|
|
For other selections you may want to browse use the link below:
Comments? StockWerld Feedback
This article is the express property
of Myst Werks © 1999 Mystifier - All Rights
Reserved.
