Directional Movement Index DMI: DI, ADX, Trend Strength

Core Description

• Directional Movement Index (DMI) helps you judge whether recent price action is being driven more by upward or downward movement.
• It does this by plotting two lines, +DI and -DI, and comparing which one is higher to infer directional pressure.
• Many traders add ADX to the same panel to gauge trend strength, while keeping DMI’s main job focused on direction.

Definition and Background

What the Directional Movement Index (DMI) is

The Directional Movement Index was introduced by J. Welles Wilder Jr. in 1978 as part of a rules-based approach to reading trends. Unlike indicators that start from moving averages, DMI begins with a simple question: did today’s highs and lows expand more in the upward direction or the downward direction compared with the prior period?

DMI is typically displayed as two oscillating lines:

• +DI (Positive Directional Indicator): reflects upward directional movement
• -DI (Negative Directional Indicator): reflects downward directional movement

A common beginner-friendly interpretation is:

• If +DI > -DI, buyers have had the stronger directional influence recently.
• If -DI > +DI, sellers have had the stronger directional influence recently.

Where ADX fits (and what it is not)

ADX (Average Directional Index) is often shown alongside +DI and -DI, but it answers a different question. ADX measures trend strength, not whether the trend is up or down. This distinction matters because a market can show directional dominance (one DI higher than the other) but still be noisy, or it can show a clearer trend with ADX rising steadily.

Why DMI remains widely used

DMI remains popular because it separates two ideas that investors often mix up:

• Direction (who is leading: +DI vs -DI)
• Strength (how forceful the trend is: ADX)

That separation makes DMI useful for both chart readers and rule-based traders who want consistent criteria for describing market conditions.

Calculation Methods and Applications

The moving parts (high level)

DMI is built from three core inputs:

• changes in High and Low from one period to the next
• True Range (TR), a volatility-aware range measure
• Wilder’s smoothing, which reduces noise and makes the lines more stable

The workflow is usually:

1. Compute +DM and -DM (directional movement components).
2. Smooth +DM, -DM, and TR using Wilder’s method (often with a 14-period setting).
3. Convert them into +DI and -DI on a 0 to 100 scale.

Key formulas (only the essentials)

Many platforms implement Wilder’s original structure with these core expressions:

\[+DI = 100 \times \frac{\text{Smoothed}(+DM)}{\text{Smoothed}(TR)}\]

\[-DI = 100 \times \frac{\text{Smoothed}(-DM)}{\text{Smoothed}(TR)}\]

ADX is derived from the separation between +DI and -DI (via DX), then smoothed again. You do not need to memorize ADX math to use it correctly. What matters most is interpreting it consistently as “strength, not direction.”

Practical applications investors actually use

1) Directional bias labeling

DMI can help you label the market environment in plain language:

• “Upward directional pressure” when +DI stays above -DI
• “Downward directional pressure” when -DI stays above +DI

This can be useful when price is noisy but still drifting in one direction.

2) Crossover alerts (not automatic actions)

A DI crossover happens when +DI and -DI swap positions. Many traders treat that moment as a prompt to re-check the chart:

• Did price break a prior swing high or swing low?
• Is volatility expanding?
• Is the move happening on meaningful volume?

3) Trend-quality filtering with ADX

A common workflow is:

• Use +DI vs -DI to assess directional pressure
• Use ADX to judge whether conditions look more like a trend or a range

For example, some traders treat ADX levels around the low 20s as a “trend may be emerging” zone, while recognizing that thresholds vary by asset and timeframe.

Comparison, Advantages, and Common Misconceptions

DMI vs popular indicators (what’s different)

DMI stands out because it is anchored to high and low comparisons, not average price relationships. That can be intuitive for people who think in terms of “higher highs” vs “lower lows.”

Advantages

Clear directional framework

If +DI stays above -DI over many periods, it creates a consistent directional narrative without requiring you to interpret every candle.

Separates direction from strength (with ADX)

Many new traders confuse “trend direction” with “trend strength.” DMI plus ADX makes that separation explicit.

Works across markets and timeframes

DMI is commonly used on equities, index ETFs, FX, and commodities because it scales movement by True Range and uses smoothing to reduce noise.

Limitations

Range-bound markets can create whipsaws

When price oscillates in a tight band, +DI and -DI can cross repeatedly. This is a common reason DMI can feel unreliable during sideways regimes.

Smoothing can create lag

Wilder’s smoothing makes signals more stable, but it also means DMI often reacts after the initial move has started.

Parameter sensitivity

A 14-period setting is common, but shorter settings can increase false signals while longer settings can delay recognition of regime shifts.

Common misconceptions (and how to correct them)

“A crossover means buy or sell immediately”

A crossover is generally better treated as an alert, not a decision. The market may still be range-bound, or the move may fail quickly. Any action should be based on broader context and a defined risk plan.

“ADX tells me if the market is bullish or bearish”

ADX is directionless. A rising ADX can occur during a strong selloff as well as during a strong rally.

“Higher DI always means a stronger trend”

DI values reflect directional movement relative to volatility. They help compare up vs down pressure, but trend quality is often assessed more reliably by combining DI behavior with ADX and price structure.

Practical Guide

Step 1: Choose a timeframe that matches your holding period

If you typically hold positions for weeks, using daily +DI and -DI readings is often more coherent than relying on very short intraday noise. DMI can look overly reactive on small timeframes, especially during low-liquidity hours.

Step 2: Use DI position to define directional bias

A simple, repeatable rule:

• Bias is “up” when +DI is above -DI
• Bias is “down” when -DI is above +DI

Then confirm with price structure:

• Upward bias can be more credible when price is making higher highs and higher lows
• Downward bias can be more credible when price is making lower highs and lower lows

Step 3: Use ADX to reduce forced decisions in choppy conditions

If ADX is low and flat, DI crossovers are more likely to be noise. In that environment, many traders reduce reliance on crossovers and focus instead on clearly defined ranges, support and resistance, or staying selective.

Step 4: Pre-define risk before acting on any signal

DMI does not define exits. One approach is to define invalidation using price:

• a recent swing low for an uptrend thesis
• a recent swing high for a downtrend thesis

Position sizing should be tied to volatility and portfolio rules, not to DI values. Trading and investing involve risk, including the potential loss of principal.

Case Study (hypothetical, for education only)

Assume a liquid U.S.-listed index ETF is observed on a daily chart:

• Over several sessions, +DI moves above -DI and stays there.
• At the same time, ADX rises from roughly 15 to the low 20s.
• Price also breaks above a prior multi-week consolidation high.

Interpretation (not investment advice):

• +DI above -DI suggests upward directional pressure is dominating.
• ADX rising suggests the market may be shifting from range-like behavior toward a more directional environment.
• The breakout provides a price-structure confirmation that the DI crossover may be more than short-term churn.

Risk framing (still hypothetical):

• An investor could define “wrong” as price falling back into the prior range and closing below the breakout level for multiple sessions, rather than exiting solely because DI lines converge.

Platform note (workflow example)

On Longbridge (Longbridge Securities), you can typically add DMI and ADX in the indicator panel, keep default settings (often 14), and save a chart template. Consistency matters: use the same settings while learning, note when signals whipsaw, and adjust only after you have enough observations to justify the change.

Resources for Learning and Improvement

Primary and foundational reading

• J. Welles Wilder Jr., New Concepts in Technical Trading Systems (for original DMI and ADX context and design logic)

Practical explainers and glossaries

• Investopedia entries on DMI and ADX (useful for quick refreshers on interpretation and common pitfalls)

Platform and implementation checks

• Your charting platform’s DMI and ADX documentation (to confirm smoothing choices, lookback defaults, and handling of missing data)

Skill-building topics that improve DMI usage

• Market regime identification (trend vs range)
• Basic price structure (swing highs and swing lows)
• Volatility and True Range concepts (to understand what DMI is normalizing by)

FAQs

What does the Directional Movement Index measure, in plain English?

Directional Movement Index measures whether recent price action has shown more upward push or downward push by comparing today’s highs and lows to the prior period. The result is summarized by two lines, +DI and -DI, that help you describe directional pressure consistently.

Is DMI the same thing as ADX?

No. DMI usually refers to the pair +DI and -DI (direction). ADX is a companion line derived from them that indicates trend strength only. ADX can rise during both rallies and selloffs.

What does it mean when +DI is above -DI?

It means upward directional movement has been stronger than downward directional movement over the lookback period. Many traders interpret that as an upward bias, then verify it with price structure such as higher highs and higher lows.

Do DI crossovers reliably predict reversals?

Not reliably. Crossovers can happen frequently in sideways markets and may not lead to sustained moves. Many traders treat them as alerts to re-check context (range vs trend, support and resistance, volatility), not as guaranteed reversal signals.

What is a “good” ADX level for trend trading?

There is no universal number. Some traders treat readings around the low 20s as “trend conditions improving,” but a common practice is to compare ADX behavior across the same asset and timeframe and focus on direction (rising vs falling) rather than a single threshold.

Which setting should beginners use (14, 20, or something else)?

Many start with Wilder’s commonly used 14-period setting because it is widely implemented and easier to compare across platforms and learning materials. If you change settings, do so deliberately and evaluate how it affects whipsaws and lag on your chosen market and timeframe.

Why does DMI perform poorly in some periods?

DMI can struggle when markets are range-bound or erratic because +DI and -DI can alternate leadership without follow-through. Data issues (gaps, illiquid candles) can also distort True Range and directional movement, making readings less stable.

Can I use DMI alone without other tools?

It is possible, but it is often not ideal. DMI provides directional pressure, not valuation, catalysts, or exit rules. Combining it with basic price structure, a volatility-aware risk plan, and optionally ADX for regime filtering can support more disciplined decisions, but it does not remove risk.

Conclusion

Directional Movement Index is a practical way to describe trend direction by comparing +DI versus -DI, while ADX can help you assess whether the environment looks more trending or range-bound. Its main value is structure: it turns subjective impressions into repeatable observations. Used with price context and risk rules, DMI can serve as a lens for interpreting directional pressure rather than a standalone prediction tool.