Giles Coghlan LLB, Lth, MA
HYCM
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.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure. *Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.
Editors’ Picks
EUR/USD rebounds from multi-week lows, trades above 1.0750
EUR/USD came under heavy bearish pressure and declined to its weakest level in three weeks below 1.0750 on Friday after the stronger-than-expected Nonfarm Payrolls data. Week-end flows, however, helped the pair erase its daily losses.
GBP/USD remains on track to snap three-week winning streak
GBP/USD recovered toward 1.2550 after coming in within a touching distance of 1.2500 in the second half of the day after Nonfarm Payrolls came in at 199,000 for November. Despite the recent rebound, the pair remains on track to snap a three-week winning streak.
USD/JPY extends recovery above 144.00, US NFP in focus
USD/JPY is extending recovery above 144.00 in Friday's European trading. The pair is finding reprieve from downbeat Japan's Q3 GDP data, which checked the Yen's towering rally against the US Dollar amid hints of BoJ's policy pivot. US NFP awaited.
Editors’ Picks
EUR/USD rebounds from multi-week lows, trades above 1.0750
EUR/USD came under heavy bearish pressure and declined to its weakest level in three weeks below 1.0750 on Friday after the stronger-than-expected Nonfarm Payrolls data. Week-end flows, however, helped the pair erase its daily losses.
GBP/USD remains on track to snap three-week winning streak
GBP/USD recovered toward 1.2550 after coming in within a touching distance of 1.2500 in the second half of the day after Nonfarm Payrolls came in at 199,000 for November. Despite the recent rebound, the pair remains on track to snap a three-week winning streak.
Gold retreats below $2,020 as US yields push higher
Gold broke below its daily range and declined toward $2,010 with the immediate reaction to the upbeat US November jobs report. Although XAU/USD managed to recover toward $2,020, rising US Treasury bond yields triggered another leg lower.
Bitcoin price could retrace to $42,000 if US Nonfarm Payroll comes in at 180,000
Bitcoin price just like other assets, is highly impacted by the macro-financial developments. This includes the Nonfarm Payrolls (NFP) report released by the BLS of the United States.
The week ahead – Fed, ECB and Bank of England rate decisions
When the Federal Reserve kept rates unchanged back in November for the second meeting in a row there was still the distinct possibility that the final meeting of 2023 would provide the possibility of one more rate rise to round off the year in line with Fed policymakers dot plot forecasts of 5.6%.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
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...
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.