What is Directional Movement Index (DMI)

Cheat Code Staff
directional movement index illustration chart

The primary aim of a trend trader is to buy and sell an asset in the direction of the trend. 

Reading directional signals from an asset’s price alone can be difficult and is often misleading because price normally swings in both directions and usually changes character between periods of low versus high volatility. 

The directional movement index (DMI) is an indicator developed by J. Welles Wilder in 1978 to identify in which direction the price of an asset is moving. 

The indicator works by comparing prior highs and lows and drawing two lines: a positive directional movement line (+DI) and a negative directional movement line (-DI).  

The placement of +DI and –DI, with respect to each other, determines the direction of pressure in price. 

If +DI  is higher than –DI, the pressure in price is more upward, indicating a buying signal, and if D- is higher, the pressure in price is more downward, indicating a selling signal. 

Here is everything you need to know about DMI. 

Average Directional Index (ADX)

ADX is a third line on the DMI, and it usually shows the strength of the trend. 

Therefore, while the –DI and +DI help highlight direction, investors can use ADX to gauge how strong an uptrend or a downtrend is. 

An ADX level above 25 signals that a strong trend is in place. 

When the ADX dips below 20, there is no certain trend, and the price is likely to move sideways. 

It is important to note that the indicators can also be used separately. 

Some traders usually choose only to view the ADX for trend strength, while others prefer only viewing the direction movement lines to aid in confirming price direction. 

Calculation of DMI

+DI is the difference between the highest price of the current day and the highest price of the day before, andDI does the same calculation with the current and previous day’s lows. 

The True Range is the greater of the current high-current low, the current high-previous close, or the current low-previous close

After this, one should smooth the 14-period averages of +DM, –DM, and the average true range (ATR). 

Then we divide the smoothened +DM value by the smoothened average true range (ATR) value to get +DI. Multiply by 100

On the other hand, divide the smoothened –DM value by the smoothened TR value to get –DI and Multiply by 100. 

The average directional movement index (ADX) is smoothed average of DX and is another indicator that is added to the DMI. 

For the calculation of ADX, one needs to continue calculating DX values for at least 14 periods and smooth the results for getting ADX.  

How to Use the DMI Indicator 

directional movement index indicator in image
Image credit: investopedia.com

The DMI indicator is available on trading platforms like MetaTrader and others. 

When it is applied, the indicator reveals three lines of the average directional index, +DI and –DI. 

The most common method of using the indicator is to know the strength of a trend. 

As such, it is only used when there is a trend and cannot be used in a ranging market. 

A common interpretation is to look at the ADX  number. 

If the number is above 25, it is a clear indication that the trend is strong. 

When the ADX number is 20 and below, there isn’t a strong trend. 

As a trader, you don’t need to limit yourself to these numbers. 

You can adjust the numbers to fit your trading strategy. 

There are some traders that use 30 as the base number to show a trend.  

Before using the indicator to enter a trade, it’s important to ensure that the chart is either trending upwards or downwards. 

This is important because it will not work well when the financial asset is ranging.  

DMI Pivots 

DMI lines pivot, or change direction, when the price changes direction. 

An important concept of DMI pivots is they should correlate with the structural pivots in price. 

When the price makes a pivot high, the +DI makes a pivot high. 

When the price makes a pivot low, the –DI makes a pivot high. 

The correlation between DMI pivots and price pivots is important for reading price momentum. 

Many short-term traders watch for the price and the indicator to move together in the same direction or for times they diverge. 

One method of confirming an asset’s uptrend is to find scenarios when the price makes a new pivot high and the +DI makes a new high. 

Conversely, a new pivot low combined with a new high on the –DI is used to confirm a downtrend. 

This is generally a signal to trade in the direction of the trend or a trend breakout. 

Limitations of the Directional Movement Index 

Notably, +DI and –DI readings and crossovers are based on historical prices and don’t necessarily reflect what will happen in the future. 

A crossover can take place,  but the price may not respond, resulting in a losing trade. 

The lines may also crisscross, resulting in multiple signals but no trend in the price. 

This can be somewhat avoided by only taking trades in the larger trend direction based on long-term price charts, or by incorporating ADX readings to help isolate strong trends. 


Join the Cheat Code Trading Academy to learn more about the directional movement index (DMI). 

Share This Article
Leave a comment