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 edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Japanese Yen trades just shy of 157.00 versus the USD
The Japanese Yen weakens across the board after BoJ announced its policy decision. A shortlived spike in the Yen may be testament to an attempt by the Japanese authorities to intervene. US PCE Price Index shows higher-than-expected inflation but does little to impact USD/JPY which almost touches 157.00.
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.
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