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Sunday, March 04, 2007 9:31:01 PM

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Lesson ADX/DMI

Directional Movement Indicator (DMI): Developed by Welles Wilder, the DMI helps determine how strong the directional movement (trend) is in a security. It is comprised of three components. The first ADX (Average Directional Index) rates the directional movement (trend) of a stock on a scale of 0-100. Generally speaking the higher the number the more a stock is trending and the more it is a candidate for a trend following system. The next two components help decipher what the trend is showing. +DI (Plus Directional Movement Index) is a measure of upward or positive movement in a stock. -DI (Minus Directional Movement Index) is a measure of negative or downward movement in a stock.

Wilder suggests buying when +DI rises above -DI and selling when +DI falls below -DI. The ADX line is then used to measure the strength of these signals. Wilder also uses what he calls the 'extreme point rule'. Don't buy or sell on the day the +DI crosses above or below the -DI. Rather, note the high (when the price is moving up) or low (when moving down) of the day. Then, wait to execute the trade until on a subsequent day the price reaches the high (to buy) or the low (to sell).

This chart shows you for LMMG that back on May 26th gave a buy signal as the DMI+ crossed the DMI- line and headed up. On June 13th the DMI- crossed the DMI+ and headed up causing a SELL signal. Here on friday we had the DMI+ (green line) cross the DMI- and headed up causing a BUY signal. Will be fun watching this stock as it runs near resistance at .081 and .086 Monday.

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