Giles Coghlan LLB, Lth, MA
Financial Source
The Directional Movement Index is a great technical tool that helps you see the direction of the market and whether the market is making gains or losses. That’s easy, you say – what’s the point of that? Well, the Directional Movement Index (DMI) lets you see the rate of change. This makes it very useful for showing a few things:
-
When the pace of gains is slowing,
-
When the rate of gains has peaked and is starting to reverse.
In summary, the DMI can help you spot a trend reversal early. Here is how it works.
The DMI calculation
The DMI is calculated this way. It is a lengthy explanation, so follow this link for the calculation. However, the bottom line is that the DMI gives a visualised measure meant for the rate of gains. When the +DM is rising and crosses the -DM then gains are outpacing losses. When the -DM is rising and crosses the +DM then falls are outpacing gains. Take a look here for an example in silver.
Looking above at the first cross marked 1 you can see that the pace of gains clearly outpaces that pace of falls over the last 14 day period (see calculation methodology in link above). This would provide a decent entry in a trending market. Similarly, looking at the cross marked 2 you can see that the pace of falls is outpacing gains and that would have provided a good entry on the sell side.
The real world application
Now it is easy to use any indicator and ‘cherry pick’ dream entries. So traders must be aware when it is appropriate to use a tool and when it is not. The DMI is best used for trending markets. So, if there is a market that you think is fundamentally due for a nice trend then consider using the DMI as one of your tools. It can help with entry confirmation and give you another way of seeing the technical picture which has proved very helpful to some very successful traders.
Our products and commentary provides general advice that do not take into account your personal objectives, financial situation or needs. The content of this website must not be construed as personal advice.
Editors’ Picks
EUR/USD holds firm above 1.1900 as US NFP looms
EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.
GBP/USD recovers losses despite rising UK political risks, BoE rate cut bets
Pound Sterling advances against the US Dollar after registering modest losses in the previous session, trading around 1.3650 during the Asian hours on Wednesday. The pair could extend losses as the Pound Sterling faces pressure from rising political risks in the UK and growing expectations of near-term Bank of England rate cuts.
USD/JPY cracks 153.00 on unabated demand for Japanese Yen
USD/JPY is extending its three-day rout below 153.00 in the European session on Wednesday, awaiting the closely-watched US NFP report. Rising bets on Fed rate cuts keep the US Dollar depressed. In contrast, expectations that PM Takaichi's policies will boost the economy and allow the BoJ to stick to its hawkish stance bolster the Japanese Yen, weighing on the pair amid intervention fears.
Editors’ Picks
EUR/USD holds firm above 1.1900 as US NFP looms
EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.
USD/JPY cracks 153.00 on unabated demand for Japanese Yen
USD/JPY is extending its three-day rout below 153.00 in the European session on Wednesday, awaiting the closely-watched US NFP report. Rising bets on Fed rate cuts keep the US Dollar depressed. In contrast, expectations that PM Takaichi's policies will boost the economy and allow the BoJ to stick to its hawkish stance bolster the Japanese Yen, weighing on the pair amid intervention fears.
Gold sticks to gains near $5,050 as focus shifts to US NFP
Gold holds moderate gains near the $5,050 level in the European session on Wednesday, reversing a part of the previous day's modest losses amid dovish US Federal Reserve-inspired US Dollar weakness. This, in turn, is seen as a key factor acting as a tailwind for the non-yielding yellow metal ahead of the critical US NFP release.
Bitcoin, Ethereum and Ripple show no sign of recovery
Bitcoin, Ethereum, and Ripple show signs of cautious stabilization on Wednesday after failing to close above their key resistance levels earlier this week. BTC trades below $69,000, while ETH and XRP also encountered rejection near major resistance levels. With no immediate bullish catalyst, the top three cryptocurrencies continue to show no clear signs of a sustained recovery.
Dollar drops and stocks rally: The week of reckoning for US economic data
Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.
5 Forex News Events You Need To Know
In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.
The challenge: Timing the market and trader psychology
Successful trading often comes down to timing – entering and exiting trades at the right moments. Yet timing the market is notoriously difficult, largely because human psychology can derail even the best plans. Two powerful emotions in particular – fear and greed – tend to drive trading decisions off course.