Indicator Toolbox – DMI Stochastic

DMI Stochastic

The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s 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. Ths week week its the turn of the DMI Stochastic (for a free 2-week trial CLICK HERE)

DMI Stochastic was authored by Barbara Star in the Stocks and Commodities Magazine, January 2013. The J. Welles Wilder Directional Movement Plus and Minus Indexes are combined to create an oscillator. These oscillator values are used as input to the familiar Stochastic Oscillator. A moving average of the price is also plotted.

DMI Stochastic

INTRODUCTION

The DMI Stochastic combines J. Welles Wilder’s Directional Movement Plus (+DI) and Minus (-DI) Indexes to be able to identify high probability reversals as a prelude to a new trend. The DMI Stochastic subtracts the -DI from the +DI to create this oscillator which tracks trend strength and momentum, as most oscillators do. When the stochastic rises in value, price is also rising and when the stochastic falls in value, price is falling.

The DMI Oscillator is used as an input to the DMI Stochastic (10, 3, 3). When the oscillator is negative, -DI is larger than +DI. It is important to gauge if the oscillator is increasing or decreasing, and not focus on the absolute value. (See weekly EUR/USD chart below).

image of DMI Stochastic trading indicator on EURUSD Chart

Let’s review stochastics. The stochastic oscillator is a momentum indicator introduced by George Lane in the 1950’s, which compares the closing price of an asset to its price range over a given time span. In general, stochastics can be used for trend confirmation, divergence, getting into the trend on pullbacks, and finding the end of the trend. In using the tool, we are going to discuss the strategy of getting into the trend on pullbacks.

USING THE  DMI STOCHASTIC TOOL

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Jody
Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.
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Jody

Jody

Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.

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