Category: Advanced Indicator Set 2

Input parameters

Calculations

PlusDM = ExpMovAvg(+DM, ExpAvgPeriod)

MinusDM = ExpMovAvg(-DM, ExpAvgPeriod)

PlusDI = 100 * PlusDM / ExpMovAvg(TrueRange, ExpAvgPeriod)

MinusDI = 100 * MinusDM / ExpMovAvg(TrueRange, ExpAvgPeriod)

DMI = 100 * Abs(PlusDI - MinusDI)/(PlusDI + MinusDI)

where:

ExpMovAvg[i] = a * TimeSeries[i] + (1-a) * ExpMovAvg[i-1],

 a=2/(ExpAvgPeriod+1);

+DM=High[i]-High[i-1]; // current High minus previous High

-DM=Low[i-1]-Low[i];   // previous Low minus current Low

If (+DM=-DM)) Then {+DM=0; -DM=0}; //outside day with no clear direction

If (+DM<0 And -DM<0) {+DM=0; -DM=0;} //inside day

If (+DM>-DM) -DM=0; // up movement is larger than down movement

If (-DM>+DM) +DM=0; // down movement is larger than up movement

TrueRange = Max(Abs(High[i]-Low[i]), Abs(High[i]-Close[i-1], Abs(Low[i]-Close[i-1]))

Discussion

The PlusDM/MinusDM indicators are average up/down movements. These indicators are not normalized, meaning their ranges of variation depend upon the underlying time series range. In contrast, the Plus and Minus Directional Indexes (PlusDI/MinusDI indicators) are average up/down movements normalized by the average True Range. So, their ranges of variation are from zero to 100. In effect, the PlusDI indicator shows what percentage of the average True Range consisted of up bars on average. Similarly, the MinusDI indicator shows what percentage of the average TrueRange consisted of down bars on average.

A Long Entry opportunity is created when PlusDI crosses over MinusDI (percent of up movements becomes higher than percent of down movements). A Short Entry signal is created when MinusDI crosses over PlusDI (percent of down movements becomes higher than percent of up movements).

The Directional Movement Index (DMI) is a composite of the up and down directional indexes. The DMI varies between zero and 100.

The higher the DMI, the more pronounced the directional movement is. The DMI does not discriminate which way the time series goes – up or down. High DMI values just signal that the market is strongly trending without revealing whether the trend is up or down.

The lower the DMI the more sideways the market is moving. Also, low DMI values signal equilibrium points like peaks or valleys.

Reference

J. Welles Wilder Jr., “New Concepts in Technical Trading Systems”, Section IV. Printed by Hunter Publishing Company, Winston-Salem, NC. 1978. ISBN 0-89459-027-8.