Premium
FXS-DMI
Doug Schaff
FX-Strategy
| Name: | FXS-DMI | |
| Characteristic: | Trend Direction | |
| Parameter Defaults: | Length | 14 |
| Trend Level | 25 | |
| Plots: | ADX | |
| DMI+ | ||
| DMI- | ||
DMI was developed by Welles Wilder Junior and is comprised of ADX together with DMI+ and DMI-. ADX is created by looking at both positive and negative directional movement and identifying sustained movement in one direction. When this occurs ADX will rise (irrespective of whether the trend is higher or lower). Trend direction is identified by whether positive movement (DMI+) is above or below negative movement (DMI-). Once ADX rises above a certain level a trend can be said to have been established.
Usage
DMI is a little used indicator but is very useful in identifying trends. Momentum indicators are best used in consolidating markets as an overbought/oversold indicator. However, if this type of signal is used in a trend, there is a large risk of losing money. Hence, the use of ADX within the DMI group is useful in identifying when momentum indicators should be used and when they should not.
The chart above shows the daily AUDUSD market. Note how the FXS-ADX regularly identifies trending price much earlier than the standard ADX. In addition, in a persistent trend that sees a minor pullback, while standard ADX often begins to decline, FXS-ADX will quickly responds to a resumption of the trend. This is evident at the left of the chart. Towards the end of a sustained trend where the final peaks are quite choppy, standard ADX will commonly fall away while FXS-ADX will remain steady.
An example of this is shown in the daily USDCHF market during the long downtrend in the first half of 2002. Note how FXS-ADX both identified the trend earlier and also continued rising throughout the entire move while the standard ADX missed half of the trending move.
The second chart below displays how a combination of FXS-RSI and FXS-ADX would have provided excellent trading opportunities. During the sustained downtrend in the USDCHF identified by a rising FXS-ADX, the oversold indications from FXS-RSI could have been avoided. However, during the rest of the period when FXS-ADX was either declining or below 25, the overbought and oversold indications provided strong reversal signals at price peaks and troughs.
