Replies to post #182 on THE BULL & BEAR

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Part Four:
DMI Confirmation
DMI lines pivot, or change direction, when price changes direction. An important concept of DMI pivots is they must correlate with structural pivots in price. When price makes a pivot high, the +DMI will make a pivot high. When price makes a pivot low, the -DMI will make a pivot high (remember -DMI moves counter-directional to price).

The correlation between DMI pivots and price pivots is important for reading price momentum. Many short-term traders watch for the price and the indicator to move together in the same direction or times they diverge. One method of confirming an asset's uptrend is to find scenarios when price makes a new pivot high and the +DMI makes a new high. Conversely, a new pivot low combined with a new high on the -DMI is used to confirm a downtrend. This is generally a signal to trade in the direction of the trend or a trend breakout

Divergence, on the other hand is when the DMI and price disagree, or do not confirm one another. An example is when price makes a new high, but the +DMI makes a lower high. Divergence is generally a warning to manage risk because it signals a change of swing strength and commonly precedes a retracement or reversal. (For more on this topic, read Divergences, Momentum And Rate Of Change.)