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Directional Movement Index (DMI)
This indicator was created by Welles Wilder. It shows if a currency pair is trending or not. And incorporates the Average Directional Index (ADX) as a signal line.
It consists of three lines:
- +DI, in Blue. This is the up trend movement line. Which indicates movement of rising price trends. That means if this line moves up, the upward trend of price is getting stronger.
- -DI, in Orange. This is the down trend movement line. Which indicates movement of falling price trends. That means if this line moves up, the downward trend of price is getting stronger.
- ADX, in Pink. This is the Average Directional Index line that acts as a signal line.
These lines operate in a range of 0 to 100.
A Buy Signal is given when the +DI crosses above the -DI and the -DI falls below the +DI. This is a bullish move.
A Sell Signal is given when the -DI crosses above the +DI and the +DI falls below the -DI. This is a bearish move.
The ADX line (Pink in the example) shows the strenght of the signal you are getting.
U = Hn - Hn-1
D = Ln-1 - Ln
TR = (Hn - Ln) | (Hn - Cn-1) | (Cn-1 - Ln)
EMAUP = EMAUn-1 + ((2 / (n + 1)) * (Un - EMAUn-1))
EMADOWN = EMADn-1 + ((2 / (n + 1)) * (Dn - EMADn-1))
EMATR = EMATRn-1 + ((2 / (n + 1)) * (TRn - EMATRn-1))
+DI = EMAUP / EMATR
-DI = EMADOWN / EMATR
DX = ABS(+DI - -DI) / (+DI + -DI)
ADX = EMADXn-1 + ((2 / (n + 1)) * (DXn - EMADXn-1))
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.