Wilder’s DMI, a set of 3 directional indicators, is an effective technical analysis tool that identifies trends, then, determines their impact on price action. While the concept behind it is rather straightforward, using it as advised privileges you to eliminate critical errors. For an experienced trader who intends to evaluate a trend’s reliability prior to following it, you may want to learn more about the indicator.
What Is Wilder’s DMI?
Wilder’s DMI (or Directional Movement Indicators) is composed of 3 separate indicators, namely:
(1) DI- or Minus Direction Indicator
(2) DI+ or Plus Direction Indicator
(3) ADX or Average Directional Index
It was created and developed by an American engineer named J. Welles Wilder, to point out an unreliable trend.
Wilder’s DMI indicates trend activity regardless of a bullish or a bearish market. With DI- and DI+, price directions can be identified easily; their sum is ADX. And, since it is non-directional as a single indicator, it can reveal an unbiased evaluation of a trend. If the previous trend showed weakness, the current trend is most likely the same.
(1) DI- – Identifies current price direction
(2) DI+ – Identifies current price direction
(3) ADX – Shows a trend’s strength or weakness based on DI- and DI+
According to Wilder’s DMI, a potentially profitable trend can be identified as is; a trend can be identified only if an ADX reading of 20 is possible. If DI+ goes below DI-, the price momentum is currently following a downtrend. Conversely, if DI- goes below DI+, the price momentum is currently following an uptrend. For instance, as many Forex traders prefer to base an ADX reading on 20, it can be concluded that an ADX reading of 20 indicates a regular trend (i.e. it can easily be the subject of a reversal).
What Happens in Case of a Crossover?
When using Wilder’s DMI, a crossover signal can sometimes appear. While it can intimidate beginners, experienced Forex traders know that the sight means that there are new opportunities for different trading ideas; it grants the chance to buy or sell, or continue pursuing a current trend. As expert traders recommend, the primary objective is to determine strong trends before proceeding with them.
– A DI+ crossover on DI- indicates a buying signal
– A DI- crossover on DI+ indicates a selling signal