MetaStock Directional Movement tutorial

The Directional Movement system (DMI) measures the strength of a prevailing trend and whether meaningful directional movement exists in the market. That makes it valuable in two distinct ways:

• As a standalone trend-following system, or
• As a filter: determine whether a security is trending, and if so, deploy your trend-following tools; if not, either stand aside or switch to range-trading indicators. Most traders get more value from this second use.

The three components

Three lines make up the system: the Plus Directional Indicator (+DI), the Minus Directional Indicator (-DI), and the trend-strength line usually plotted as its average, the ADX. The maths behind them is heavy going and, honestly, not required knowledge: what matters is that the ADX line denotes trend strength, and the DI lines carry the directional information.

Reading it

The basic method: first confirm the security is trending, shown by a rising ADX. Then read the crossings of the DI pair: +DI rising above -DI is the bullish sign; +DI falling below -DI is the bearish one. No rising ADX, no trend, and trend signals in a trendless market are noise.

The MetaStock formulas

Syntax: ADX(Periods), where Periods sets the averaging window.

The 14-period Average Directional Movement:

ADX(14)

And the genuinely useful application, a trend filter for your explorations:

ADX(14) > 20 AND ADX(14) > Ref(ADX(14),-1)

Read aloud: trend strength above 20, and strengthening versus the previous bar. Put that in front of any trend-following entry and you have taught your Explorer scan to ignore markets going nowhere. There are many ways to build on it, but that filter alone improves most beginners' systems, and like every rule on this blog, it should earn its place through a proper backtest before it trades.

Watch the walkthrough