There are three lines that make up the Wilder's DMI (NYSE:ADX) indicator:
ADX, DMI+ & DMI- ;
The ADX line shows the strength of the trend of any financial asset in either direction.
Here is the beauty of this indicator. You learn one indicator and it can be used for stocks, bonds, currencies, commodities, futures, etc.
In a nutshell, the higher the ADX value, the stronger the trend. J. Welles Wilder the creator of the index states: "a strong trend is present when ADX is above 25. Some traders will consider 20, and I will do that myself sometimes. I always want to buy an asset that is trending up.
Now, for the DMI+ & DMI-
DMI+ stands for: Plus Direction Movement Indicator.
DMI- stands for: Minus Direction Movement Indicator.
Now, here is how you apply it:
When DMI+ is above DMI- and ADX is at 25 or better, a strong UPTREND exists.
When DMI- is above DMI+ and ADX is at 25 or higher, a strong DOWNTREND exists.
Here is what it looks like:
When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend.ADX is nondirectional and quantifies trend strength by rising in both uptrends and downtrends.
Figure 1 is an example of an uptrend reversing to a downtrend. Notice how ADX rose during the uptrend, when +DMI was above -DMI. When price reversed, the -DMI crossed above the +DMI, and ADX rose again to measure the strength of the uptrend.
Source: TDAmeritrade Strategy Desk
How do I use this indicator:
1. Take some profits off the table when the price trend changes from up to down. I can then buy some in lower.
2. When a stock that I am interested in purchasing is in a downtrend, I can use this indicator to identify a change in trend to the upside and I can take advantage of the new trend up.
3. The indicator gives me an idea where prices are going so I can make better buy sell decisions.
This indicator is a good directional indicator that has served me well. However, it must not be used alone without confirmation from other indicators.
I do plan on publishing a whole article on this indicator complete with examples for those who are following me. So hit the follow button.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, portfolio asset mix, diversification. Readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Investing in public securities is speculative and involves risk, including possible loss of principle. The reader of this article must determine whether or not any investments mentioned in this article are suitable for their portfolio, risk tolerance and accepts responsibility for their decisions.