Directional Movement Index (DMI)

The Directional Movement Index (DMI) was created by J. Welles Wilder to identify the overall trend of an asset's price. This technical indicator assists traders in evaluating the direction of the trend by comparing previous highs and lows.

DMI consists of two lines: a positive directional movement line (+DI) and a negative directional movement line (-DI). An optional third line, known as directional movement (DX), illustrates the difference between these two lines.

When +DI is positioned above -DI, it indicates that there is greater upward pressure on the price. Conversely, if -DI is above +DI, it suggests that downward pressure is stronger. Crossovers between these lines are often interpreted as trade signals for buying or selling. For instance, if +DI crosses above -DI, it may indicate the beginning of an upward price trend. The wider the gap between the two lines, the more pronounced the price trend becomes. A significant elevation of +DI over -DI indicates a strong upward trend, while a substantial rise of -DI over +DI signifies a strong downward trend.

To calculate the DMI, one must determine the difference between the current high and the previous high (referred to as "HiDiff"), as well as the difference between the previous low and the current low ("LowDiff"). These two values are then compared.

If HiDiff is greater, a variable +DMI is assigned the value of HiDiff, while a variable -DMI is set to 0. If LowDiff is greater, -DMI is assigned the value of LowDiff, and +DMI is set to 0. In cases where the two values are equal or no trend is detected in either highs or lows, both values are set to 0. Subsequently, a calculation known as the Welles Summation is performed on both +DMI and -DMI, yielding two results: +DI and -DI, both of which range from 0 to 100.