Directional Movement can be used either as a system on its own or as a filter on a trend-following system. It help trader find if a particular stock is trending or not. Two lines are generated in a DMI study, +DI and -DI. The first line measures positive (upward) movement and the second number measures negative (downward) movement. A buy signal is given when the +DI line crosses over the - DI line while a sell signal is generated when the +DI line crosses below the - DI line. A low ADX value (generally less than 20) can indicate a non-trending market with low volumes whereas a cross above 20 may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend. This indicator can also be used to identify non-trending markets, or a deterioration of an ongoing trend. Directional Movement Index was developed by Welles Wilder and explained in his book, New Concepts in Technical Trading Systems.
