General Overview of the Directional Movement (ADX/DMI)
Tool
The
ADX-DMI combines three indicators that describe the
relative strength of trends, as well as provide exit
signals for exhausted patterns. Like stochastics, it
is used in both entry and crossover exit trading strategies.
The three components of the ADX/DMI include:
| 1. |
The
red ADX line, which indicates the trend of the
market. ADX assumes trading significance once
it gets over 40. |
| 2. |
The +DMI measures the strength of
upside pressure. |
| 3. |
The -DMI measures the strength of
downward pressure. |
Note that the Step Parameter may
also be varied; the eSignal default of 14 is preferred.
You may experiment with this value for curve-fitting
purposes, much like the MA Step Parameter.
A basic +DMI/-DMI buy signal occurs
when the (green) +DMI line crosses up over the (blue)
-DMI line.
A basic +DMI/-DMI sell signal
occurs when the (blue) -DMI line crosses down over the
(green) +DMI line.
In addition, the ADX is used to
measure the relative strength of the current trend,
known as the directional change. When the ADX is rising
over 40, the issue is in a strong trend; when it is
in the 10 - 30 range, the trend is weak.
Combining this understanding of
the ADX/DMI indicators with an understanding of volume
bar increases forms the basis of an effective breakout
trading strategy. Other factors that add strength to
entries include monitoring the relative strength of
the sector being traded and trading only when the composite
index is outside of the previous day's trading range
at the time of entry, on a new two-day high/low breakout.
Adding ADX/DMI Indicators to Your
Charts
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