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How to Trade Forex Using the DMI Indicator

The DMI indicator, which stands for Directional Movement Index, was created by J. Welles Wilder in 1978 and is a powerful tool used by Forex traders to analyze movement and identify trends before they occur.

As such, it is a useful indicator to know in order to more easily determine trend strength and the possible direction of future moves.

+DMI and -DMI

The DMI uses two lines. The first is the positive directional movement indicator (+DMI), which measures the strength of bullish or upward movement, while the second is called the negative directional movement indicator (-DMI). This measures any bearish or downward movement.

Thus, when the market rises and falls, +DMI also rises and falls, while the -DMI does the opposite (rising when the market falls and falling when the market rises). Whichever indicator is higher, +DMI or -DMI, is then called the Dominant DMI, and it is this line that indicates which direction the market is likely to head.

Trading the DMI

The most popular way to trade the DMI is to wait until the +DMI and -DMI cross over. Since it is at this point that a clear signal arises, showing a change in trend in the market. This is usually a good indication of trend, however, it is not wise to use the DMI cross-over as the sole reason for making a trade. The DMI cross-over tends to work much better when combined with other indicators that confirm the trend direction or strength.

Mean price

As suggested, cross-overs provide a good indication towards a change in trend however they can sometimes lead to false signals, especially during volatile periods.

One way to get around this problem is to look at the recent mean price, which is depicted as the central line that runs through the DMI. This measures DMI strength on a scale of 0 to 100 and can provide extra confirmation after a cross-over has taken place.

If the +DMI or –DMI moves past the 25 mark, it shows that the trend has changed more strongly and is therefore a better indicator than the trend has changed than simply relying on a cross-over signal.

Depending upon which indicator line moves past the 25 mark, it is also a good idea to look at the opposite line. If +DMI is above 25 and –DMI is also past 25, then this is an even more reliable signal. Since the further these two lines move apart, the stronger the trend.

Combining with the ADX

Although the DMI is a strong indicator in its own right, it is even better when combined with other indicators.

This is particularly true when it is combined with the ADX indicator which measures trend strength. Since the ADX indicator measures the strength of a trend but does not pay any particular attention to direction, the ADX and DMI can fulfill two separate but equally important roles. The pairing can make for quite an effective combination when used together effectively.

You can practice these theories by using one of the trading platforms provided by FXTM.

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