the daily chartist

Trading strategy using Directional Movement Index - DMI

published 3 years ago
EXAMPLE:EUR/USD H4

DMI is one of the most efficient trend-signal-forming indicator and it is very effective and is often used by traders. It is designed by Wells Wilder. The DMI system consists of three lines - ADX, +DI and -DI, and it can be used to generate signals and as a filter for the trend. The DMI system has these conditions: 

  • Rising ADX - shows that the market has a nicely shaped direction of movement so that you can follow the trend.
  • Falling ADX - shows that the force of the trend weakens or there isn't a trend forming at all.
  • When ADX is above 20-25, we have a trend. When its values begin to decrease from levels above 40, the trend is weakening. 

 The DMI system generates the following signals:

 Long position:

  1. ADX is above 25 and it is rising.
  2. When +DI crosses -DI from bellow to above, the bar at which this event occurs, we mark as the signal bar.
  3. We place a buy stop order above the maximum of the signal bar.
  4. When opening a log position - we place our stop loss at 5-10 pips bellow the minimum value of the candle/bar where we open our position. 
  5. When the market goes in our direction, we move the top loss at 5-10 pips bellow the lowest  values of every new local minimum.
  6. We close our position when our stop loss is activated, crossing of the +DI and -DI or when a decreasing in the values of the ADX from levels above 40 occurs. 

 Short position:

  1. ADX is above 25 and it is rising.
  2. When -DI crosses +DI from bellow to above, the candle/bar at which this event occurs, we mark as a signal bar.
  3. We place our sell stop order bellow the low of the signal candle.
  4. When opening a short position, we place our stop loss at 5-10 pips above the highest point of the signal candle or the candle where we open our position.
  5. When the market starts running in our direction, we move our stop loss 5-10 pips above the highs of the new formed local maximums.
  6. We close our position when our stop loss is activated, crossing between -DI and +DI or a decrease in the values of the ADX from above 40.

 There can be a lot of noise between the main signals to buy or sell, so you can combine ADX with another trend indicator and as always try this strategy on demo, before going out with it live.