Forex Indicator Toolbox
The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s forex trading Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
Directional Movement Indicator (DMI)
The Directional Movement Indicator (DMI) is a well-known forex trading indicator to assess market direction and trend strength. DMI shows whether the trend is up or down and is strong or weak. This is a good indicator for those traders who want to assess strong trends and enter only when these trends are strong. Just like other indicators, DMI can be applied to any market and time frame.
DMI is a moving average of range expansion over 14 periods (default). The green +DMI measures the strength of uptrends and the red -DMI measures the strength of downtrends. When the green line is above the red line, it is dominant, and the trend is up. When the red line is above the green line, it is dominant and the trend is down. Traders look for crossovers and can use a crossover as a signal to enter long or short. However, using the crossover as a system can yield false trades so it is better to have direction in mind and use it to trigger a directional trade.
For example, in the Dow Daily chart above, the Dow is in a strong uptrend. For the most part the green +DMI is above the red -DMI but there are false bearish signals with the red line crossing above the green line. Rather than sell this bullish market when the red crosses above the green, one can use it as a signal to buy when the green crosses back above the red line. Another way of putting this, is when the red line crosses above the green line, the market is retracing or correcting the bullish move.
USING THE DMI FOREX TRADING INDICATOR TOOL
The +DMI is usually in sync with the price moving higher; as price progresses up, so does the +DMI line. When price corrects, so does the +DMI line. It crosses down through the -DMI line when the correction is steeper than normal sideways corrections in an uptrend. When the -DMI or red line is above the green line, price is falling in a downtrend, so red above green means down and green above red means up.
In the 4-hour DOW chart below, notice the blue horizontal lines highlighting the crossovers. Also, notice the sideways price action where the crossovers occur. It isn’t until the trend resumes again that the distance between the green and red lines are separating nicely, indicating a strong trend. In fact, the higher the DMI value, the stronger the trend. DMI ranges from 0 to 100. A DMI above 25 means the direction is strong and below 25, weak.
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