Trend Indicators: DMI and ADX


Home > Technical analysis > Indicators and oscillators > Directional Movement index (DMI or DX) Directional Movement index (DMI or DX) DMI filtrates on price exchange rates lays in the basis and let's enter the market only if substantial trends exist. It is developed for increasing the strength of all upward or downward trends in the Forex .

As with every system, you have to learn how to maximize winners and cut losses and small profits effectively. Take a free trading course with IG Academy Our interactive online courses help you develop the skills of trading from the ground up. So all traders have to do , to gauge the trend , is to identify which DMI line resides above the other. Reading DMI is relatively straightforward. Results achieved on the demo account are hypothetical and no representation is made that any account will or is likely to achieve actual profits or losses similar to those achieved in the demo account.

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When the ADX goes up, all it means is that the trend is gaining strength — this can then signal both a bullish or bearish trend. The two screenshots below show this nicely and the ADX rises both during the uptrend first screenshot and during the downtrend second screenshot. Finally, we must talk about the threshold level of the ADX. As you can see in the screenshots below, we plotted a vertical line at the ADX window at the In the screenshot below we marked the first time the ADX breaks above the The second part of the ADX indicator are the two DI lines which are usually color-coded red and green in our example.

The DI lines provide directional information and they also measure trend strength. The only thing you should remember is that the DI lines compare the absolute candle highs and the absolute lows of candles. Here are a few scenarios:. On the screenshot below, we set the DI period setting to 1 which means that the indicator just compares the two most recent candles.

This is a good way of understanding the DI calculations quickly. Keep in mind, the DI just looks at the absolute high and the low not the candle body. When the DI lines cross each other, they give a signal; when the green line crosses above the red line, it means that the highs and lows of the previous candles are both moving higher which confirms an uptrend.

When the red DI line crosses above the green DI line, it shows that over the past candles, price has been moving down and the lows and highs are going lower.

In the screenshot below we can see this nicely. First, the ADX line crosses above 20 first black vertical line but at this point, price was in a range. Then, things turned around and the green line broke above the red DI line and the ADX started to pick up again. Once the red DI line crossed above the green line, the trend was over red vertical line. Referring to earlier article on reversal strategy, recall that trader identifies a pattern and anticipates a reversal in price action for a new trend, with reference to 3 points in the price action.

In the absence of any other indicators, it may seem quite risky to rely solely on the signals of reversal strategy. Complementing the indications given off from pattern with a trend setting signal from DMI and MACD, raises the probability of successful trade and also ascertain the movement in approximate number of pips.

For an uptrend reversal approach, follow the rules for setting up the trade up till the point of entry that is point 4. If these signals point towards an uptrend, enter in the call binary option trade.

In such cases, the price most likely moves the distance beyond the number of pips it moves between points 2 and 3. Therefore, the trader can continue trading binary call option up till the price moves this additional distance.

Similarly, if the trader is looking to trade a downtrend reversal, the trader should follow the rules for setting up the trade up till the point of entry that is point 4. If these signals point towards downtrend, enter in the put binary option trade. Here again the price moves the distance beyond the number of pips it moves between points 2 and 3, enabling trader to continue trading binary call option up till the price moves the additional distance.

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