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Directional Movement Index

The Directional Movement Index (DX) was developed by J. Welles Wilder and described in his book "New Concepts In Technical Trading Systems", written in 1978. The DX consists of two parts: the Positive Directional Index (+DI) and the Negative Directional Index (-DI). The DX's main purpose is to help identify equilibrium points in the price movement by measuring true directional movement. The +DI line measures positive (upward) movement while the -DI measures negative (downward) movement.



Below are a few common methods for generating trading signals using the Directional Movement Index.

+DI/-DI Crossovers: When the +DI line crosses above the -DI line a buy signal is initiated (indicating that positive price direction is greater than negative price direction). Conversely, when the -DI line crosses above the +DI line a sell signal is initiated (indicating that negative price direction is greater than positive price direction). When using the DMI crossover method to generate trading signals, Wilder stresses the use of an additional "extreme point rule". The extreme price rule states that when the +DI/-DI crossover occurs, the extreme point will become the high or low of that bar. Before entering a trade based on the direction of the +DI/-DI crossover, the price must first break above the high (for a buy) or break below the low (for a sell) and remain above/below those respective levels for several bars before intiating a new trade or exiting a existing trade. The "extreme point rule" is useful in reducing the number of whipsaws and false breakouts a trader may encounter if trading based on +DI/-DI crossovers alone.

Directional Movement System: Wilder typically suggests to use the DX as a filter along with other indicators (such as the ADX or ADX(R)) to create a more concrete trading methodology. Wilder suggests using the DMI as part of a system that includes the ADX indicator. (See the Directional Movement System indicator for additional details)

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