Trading Using The Directional Movement System This page deals with detailed trading specifics based on Directional Movement indicators. For a general introduction to Directional Movement, refer to our Directional Movement Overview for an understanding of the concepts. The computations used to identify stocks in tranding patterns are based on Welles Wilder's Directional Movement system from his book "New concepts in Technical Trading Systems". Specifically, a 14 day period is used to calculate the moving averages as well as Wilder's accumulation techniue for computing the averages themself. Key Directional Movement Indicators +D14 Indicator  :  This indicates the percentage of time a stock has had upward directional movement over the last 14 days (this is an accumualted average). -D14 Indicator  :  This indicates the percentage of time a stock has had downward directional movement over the last 14 days (this is an accumualted average). DI Diff  :  The difference between +DI14 and -DI14. The greater the difference the stronger the trending pattern. Is this value increasing or decreasing over time? ADX  :  This is the Average Directional Movement Index. It represents the total percentage of time a stock has spent in either an upward or downward trend over the last 14 days (this is an accumulated average). The higher the ADX value the better - the more time a stock spends in a trending pattern (either an uptrend or a downtrend) the more opportunities there are for trading the trend. The key to interpresting the ADX value is to note whether it is increasing day after day - meaning that the trend is increasing in strength, or is the ADX declining day after day - meaning that the trends is decreasing in strength. ADXR  :  This is the Average Directional Movement Index Rating. It is used as a rating to indicate whether a stock is a good or a bad candidate for trend analysis. Trading Long New Up Trend  :  A stock is considered to be starting a new uptrend if its' +DI14 crosses above its' -DI14 and the stocks' ADXR is greater than 25. The price high on the day that this cross-over occurs is considered a "trigger" price. You would take a long position if the price of the stock on a subsequent trading day goes above this "trigger" price (assuming that the +DI14 is still greater than -DI14 and that ADXR is still greater than 25). dmTrend generates trending signals based on Wilder's criteria (see above) but also will generate potentially earlier signals based on the following criteria - a trend will be triggered when +DI14 crosses over -DI14 and the ADX value is over 20. This early signal implies that a strong trend is indicated but may not yet be in place and requires that you track the ADX changes from day-to-day to ensure that the ADX continues to increase - indicating that the trend is indeed getting stronger. You will still be able trade on a more conservative basis by waiting for the conventional signal of ADXR exceeding 25 but for those wishing to get in earlier - and can accept the increase in risk (fluctations in price as the trend may not be completely proven yet) - then the ADX 20 signal will be the one to use when considering a long position. Con't Up Trend  :  Once a stock has established a new uptrend, it is considered to remain in that up trend until +DI14 falls below -DI14 or its' ADX falls below 20 or when four consecutive ADX down days occur. Trading Short New Down Trend  :  A stock is considered to be starting a new downtrend if its' -DI14 crosses above its' +DI14 and the stocks' ADXR is greater than 25. The price low on the day that this cross-over occurs is considered a "trigger" price. You would take a short position if the price of the stock on a subsequent trading day goes below this "trigger" price (assuming that the -DI14 is still greater than +DI14 and that ADXR is still greater than 25). dmTrend generates trending signals based on Wilder's criteria (see above) but also will generate potentially earlier signals based on the following criteria - a trend will be triggered when +DI14 crosses over -DI14 and the ADX value is over 20. This early signal implies that a strong trend is indicated but may not yet be in place and requires that you track the ADX changes from day-to-day to ensure that the ADX continues to increase - indicating that the trend is indeed getting stronger. You will still be able trade on a more conservative basis by waiting for the conventional signal of ADXR exceeding 25 but for those wishing to get in earlier - and can accept the increase in risk (fluctations in price as the trend may not be completely proven yet) - then the ADX 20 signal will be the one to use when considering a long position. Con't Down Trend  :  Once a stock has established a new downtrend, it is considered to remain in that up trend until -DI14 falls below +DI14 or its' ADXR falls below 25 or when four consecutive down days occur. Trade Exits Directional Movement is good at confirming and identifying trends and therefor entry points for long and short trades. However, it is not advisable to remain in your position until the trend reverses because the smoothing techniques result in a slow indicator (e.g. ADX). Develop your own exit strategy. The "Interpretations" section below is a good starting place for developing your exit strategy. Some Interpretations of Directional Movement Indicators No stock picking system is infallible and Directional Movement trend analysis is no exception. Always confirm trends with other indicators. Here are some guidelines you should always consider: A turning point may be indicated with the first dowturn of the ADX line after the ADX has crossed above both +DI14 and -DI14. If you're trading a trend and ADX falls below both +DI14 and -DI14, the Directional Movement indicators are no longer valid trading indicators. If the stock has been trending for more than 3 days and the difference between +Di14 and -DI14 is less than 10, the trend may be too weak to justify a long or short position. A general decline in the ADX values over several days may indicate the trend is coming to and end. It may be better to exit a position rather than wait for a trend to reverse - by then, it tends to be too late. Remember, the Directional Movement numbers are based on 14 day averages and so are lagging indicators. Adopt something like an 8% stop loss rule as favored by followers of William O'Neill (Canslim) for a exit position. When ADX crosses above 20 a potential strong trend may be indicated. A positive indicator of increasing trend strength is when both the DI difference (i.e. the difference between +DI14 and -DI14) and the ADX are increasing. According to Wilder, you should trade those securities with the highest ADXR values. 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. Chart Filter Incredible Charts Investopedia LeBeau on Directional Movement Street Authority Trader Talk - basics of ADX Trader Talk - how to trade using ADX