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Directional Movement System

The Directional Movement System is a complex indicator developed by J. Welles Wilder and described in his book "New Concepts In Technical Trading Systems", written in 1978. The Directional Movement System consists of the ADX (or ADX(R)) and the Directional Movement Index indicators.

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Interpretation

Through the use of the ADX (or ADX(R)) and Directional Movement Index indicators, a concrete trading methodology can be constructed. For example, one variation of the rules for trading using the Directional Movement System as defined by Dr. Alexander Elder in "Trading For A Living" is as follows:

Buy Entry: ADX (or ADXR) rises while +DI and ADX (or ADXR) are above -DI; or ADX (or ADXR) turns upwards from below +DI and -DI
Buy Exit: +DI crosses below -DI; or ADX turns downwards from above +DI and -DI

Sell Entry: ADX (or ADXR) rises while - DI and ADX (or ADXR) are above +DI; or ADX (or ADXR) turns upwards from below +DI and -DI
Sell Exit: -DI crosses below +DI; or ADX (or ADXR) turns downwards from above +DI and -DI

No trades are entered while ADX (or ADXR) is below both +DI and -DI; this indicates what's commonly referred to as a "lifeless" market. The longer that ADX (or ADXR) remains below the +DI and -DI the stronger the next emerging trend will likely be. Dr. Elder also recommends waiting to enter new trades until after the ADX (or ADXR) rises a minimum of 4 steps from its low (i.e.: if the ADX low was 16 it must rise to at least 20) indicating that that it has clearly turned upwards from its bottom.

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