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The Directional Movement System
For an in-depth understanding about Directtional Movement, refer directly to Welles
Wilder's book "New Concepts in Technical Trading Systems". In this book you will
find all the formulas, accumulation techniques and sample worksheets required to
get a working, hands-on understanding of this technique in stock price analysis.
If you would like information more directed at trading, refer to the
Trading Using Directional Movement section of our website.
Overview
Directional Movement attempts to infer the "true" movement of a stock based on its'
price changes from one day to the next. For example, a stock's price could close up
one day compared to the day before but Directional Movement indicators may reveal
that the stock's actual movement is downward.
Technical Indicators
The Directional Indicator (DI) for a stock reveals its' "true" movement and not necessarily
that of the price movement of the stock. DI can be up, +DI, or down, -DI. The +DI/-DI value
for a stock on any given day is calculated based on that stock's Directional Movement (DM)
and True Range (TR) for that same day. With daily +DI and -DI values, an accumalting smoothing
average is applied over a 14 day period in order to come up with the +DI14 and -DI14
trend lines and Average Directional Movement Index (ADX).
Directional Movement
The DM for a stock on a given day is one of up, +DM, down, -DM or zero.
Visually, it is fairly
simple to determine the DM value for a stock. It is based on comparing the day's high and low
with yesterday's high and low.
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- +DM
- Feb.2.High - Feb.1.High = 15-12 = 3
- For Feb. 2, XYZ has a +DM=3 and a -DM=0.
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- -DM
- Feb.1.Low - Feb.2.Low = 8-6 = 2
- For Feb. 2, XYZ has a -DM=2 and a +DM=0.
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- Both +DM and -DM exist - an "outside day"
- Feb.2.High - Feb.1.High = 15-12 = 3
- Feb.1.Low - Feb.2.Low = 8-6 = 2
- The relevant movement would be the higher DM value.
- For Feb. 2, XYZ has a +DM=3 and a -DM=0.
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- Both +DM and -DM are zero - an "inside day"
- For Feb. 2, XYZ has a +DM=0 and a -DM=0.
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True Range
The True Range (TR) for a stock measures the widest price difference of a stock between
a given day and the previous day. True range is the greatest of the following:
- Current high less the current low.
- The absolute value of the current high less the previous close.
- The absolute value of the current low less the previous close.
Putting it All together
Having calculated a stock's DM value for a given day as well as the TR for that day, the
DI value is DM/TR. This value indicates what percentage of a stock's price range is
in some sort of a trend (+DM for up and -DM for down).
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- +DI
- Feb.2.High - Feb.1.High = 15-12 = 3
- For Feb. 2, XYZ has a +DM=3 and a -DM=0.
- True range is 5 (current high - current low).
- +DI = 3/5 = 60% and -DI=0
- If using a -Dm value then we end up with a -DI value and +DI=0.
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Link Suggestions
There is no direct or indirect affiliation between dmTrend and an of the following companies/websites.
We provide the following links as a service to better your understanding and interpretation
of the Directional Movement concept. dmTrend does not profit directly or indirectly from
any of the services promoted on any of the following sites.
Please read our statement of liability for further clarification of the above.
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