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Directional Movement Index (DMI)
The Directional Movement Index (DMI) is a technical analysis tool developed by J. Welles Wilder Jr. in 1978 that measures both the strength and direction of a price trend. It consists of three lines: the Positive Directional Indicator (+DI), the Negative Directional Indicator (-DI), and the Average Directional Index (ADX). Together, the three components tell you whether a market is trending and which direction it is moving.
The DMI appeared in Wilder's book "New Concepts in Technical Trading Systems," the same publication that introduced the Relative Strength Index and the Average True Range.
The Three Components of the DMI
Each component of the DMI answers a different question about price movement. Using them together gives you a more complete picture than any single indicator alone.
- +DI (Positive Directional Indicator): Measures upward price movement. When +DI is high and rising, buyers dominate and the market is trending up.
- -DI (Negative Directional Indicator): Measures downward price movement. When -DI is high and rising, sellers dominate and the market is trending down.
- ADX (Average Directional Index): Measures trend strength without regard to direction. An ADX above 25 signals a strong trend. An ADX below 20 signals a weak or absent trend. ADX does not tell you which way the market is moving; it tells you how strongly it is moving at all.
How to Read the DMI for Trade Signals
Traders use the relationship between +DI and -DI to generate entry and exit signals. The basic crossover rule is straightforward: when +DI crosses above -DI, it signals a potential uptrend and a possible buy opportunity. When -DI crosses above +DI, it signals a potential downtrend and a possible sell or short opportunity.
Wilder himself recommended using these crossovers only when confirmed by the ADX. A crossover that occurs while ADX is above 25 and rising is a stronger signal than one occurring when ADX is below 20 and flat, which often produces false signals in choppy sideways markets.
The ADX Trend Strength Scale
Wilder provided specific ADX thresholds for interpreting trend strength. Knowing where ADX falls helps you decide whether to trade with the trend or step aside.
- 0 to 20: Weak or absent trend. The market is ranging. Trend-following strategies perform poorly in this zone.
- 20 to 25: Possible beginning of a trend. Monitor for confirmation.
- 25 to 50: Strong trend in place. Trend-following strategies are most effective here.
- 50 to 75: Very strong trend. Price moves can be large and sustained.
- 75 to 100: Extremely strong trend, rare in practice. Usually precedes a sharp reversal or consolidation.
DMI vs. MACD
| DMI / ADX | MACD | |
|---|---|---|
| Primary Function | Measures trend direction and strength separately | Shows momentum and potential reversals |
| Lag | Moderate; uses smoothed averages over 14 periods | Moderate; based on exponential moving averages |
| Best For | Confirming whether a trend is worth following | Identifying entry timing within a trend |
| Directional Output | Yes; +DI and -DI show which direction dominates | Yes; MACD line above zero signals bullish momentum |
Practical Limitations
The DMI is a lagging indicator. It confirms trends after they begin rather than predicting them. In fast-moving or highly volatile markets, the 14-period default smoothing can cause signals to arrive well after the optimal entry point.
The indicator also produces unreliable signals in sideways markets. When ADX is below 20, +DI and -DI lines cross frequently without leading to sustained directional moves. Using the ADX component to filter out low-trend-strength environments is the most important practical adjustment you can make when incorporating DMI into a trading system.
Sources
- https://www.cboe.com/education/
- https://school.stockcharts.com/doku.php?id=technical_indicators:average_directional_index_adx
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