Directional Movement Index

DIRECTIONAL MOVEMENT INDEX (DMI)

Directional movement compares a security's trading range for one day to the trading range on the previous day. Positive directional movement (+DM) occurs when today's high is greater than yesterday's high, while negative directional movement (-DM) appears when today's low is less than yesterday's low.

Based on the average of positive and negative directional movement over a certain time period, a positive directional movement indicator (+DI) and a negative directional movement indicator (-DI) can be plotted.

Calculation Method:

Let +DM_trepresent the positive directional movement for Day t and -DM_trepresent the negative directional movement for Day t.

Then, +DM_t= H_t- H_t-1 [ if H_t> H_{t - 1}]

-DM_t= L_t- L_t-1 [ if L_t< L_{t - 1}]

TR (“true range”for the security on Day t) is calculated as follows:

TR_t = H - L [ if L_{t - 1} ≧ L_t]

H_t - H_{t - 1} [ if L_{t - 1}< Lt]

L_{t - 1} - L_t [ if H_t< H_{t - 1}]

Then, +DI = [(+DM₁) + (+DM₂) + … + (+DM_t)] / (TR₁ + TR₂ + … + TR_t)

-DI = [(-DM₁) + (-DM₂) + … + (-DM_t )] / (TR₁ + TR₂ + ... + TR_t)

　

In our Java Charting System, we have defaulted 10 days to be the selected time horizon for calculating these indicators. The box on the top right hand side is open to you for entering any preferred time horizon (e.g. 14 days).

When the +DI crosses the -DI to the upside, it generates a long signal. On the contrary, a short signal is generated when the +DI crosses through the -DI to the downside. The above chart showed that this trading strategy works quite well for "i-Cable Communications" in Jul-Nov 2000.