Understanding market direction is a key part of building a trading strategy. Whether you're just starting out or looking to refine your technical skills, the Directional Movement Index (DMI) offers an insightful way to assess trends in the futures markets. Originally developed by J. Welles Wilder, this tool helps traders determine whether bulls or bears are in control—and how strong that control might be.
Let’s break down how the DMI works and how it can help inform your futures trading decisions.
What is the Directional Movement Index?
The DMI is a trend-following indicator that identifies whether a market is trending—and if so, in which direction. The DMI is made up of two lines:
- DI+ (positive directional indicator): Measures upward movement
- DI− (negative directional indicator): Measures downward movement
These two lines are derived by comparing the highs and lows of price bars, rather than closing prices, which can give a clearer sense of how prices are truly moving. When DI+ is above DI−, it signals a bullish trend; when DI− is above DI+, the trend is bearish.
How the DMI is calculated
At the core of the DMI is a comparison of recent price movements. Instead of focusing on where a bar closes, the DMI looks at how much higher or lower a bar’s high and low are compared to the previous bar. Here’s a simplified overview:
- Up move = current high − previous high
- Down move = previous low − current low
The indicator keeps the value of the dominant move and assigns a zero to the weaker one. Over time, the dominant values are smoothed out using an average to create the DI+ and DI− lines. This smoothing helps clarify the overall trend direction and minimizes short-term price noise.
Reading Directional Movement Index lines
The crossover of DI+ and DI− is one of the most useful features of the DMI. Here's how traders typically interpret them:
- DI+ crossing above DI−: Signals a potential bullish trend
- DI− crossing above DI+: Indicates a potential bearish trend
- Wide separation between the lines: Suggests a stronger trend
- Frequent crossovers with little separation: May indicate consolidation or a non-trending market
While these signals are helpful, they’re best used in combination with other tools or chart analysis for confirmation.
Introducing ADX: Measuring trend strength
Wilder also developed the average directional index (ADX) as part of the DMI system. ADX doesn’t show the direction of a trend—it simply quantifies its strength.
The ADX line is calculated based on the difference between DI+ and DI− and ranges from 0 to 100. Common thresholds include:
- Below 20-25: Weak or nonexistent trend
- Above 25: A trend is in place
- Above 40: Strong trend, either bullish or bearish
The ADX can help traders avoid false signals and focus on markets that are genuinely trending. While it doesn't indicate direction, it’s powerful when paired with DMI lines.
Why the Directional Movement Index matters for futures traders
Futures markets often feature high volatility and leverage, making trend identification especially important. The DMI can help you:
- Spot when bulls or bears are in control
- Identify potential entry and exit points
- Avoid trading during low-momentum, consolidating markets
- Confirm trend direction with other indicators or chart patterns
Used effectively, the DMI can provide clarity during uncertain periods and help you align your strategies with prevailing market conditions.
Getting started with the Directional Movement Index on NinjaTrader
Ready to explore how the DMI fits into your strategy? The NinjaTrader platform makes it easy to apply and customize the DMI and ADX to your preferred markets and time frames:
- Access over 100+ technical indicators including DMI and ADX.
- Customize chart settings and alerts to fit your trading style.
- Analyze trends across time frames in simulated and live environments.
You can practice with DMI in NinjaTrader’s free sim environment to see how it aligns with your technical analysis approach.
Explore market momentum with DMI
The Directional Movement Index can be a valuable addition to your technical toolbox, helping you understand not just the direction of a trend—but who’s in control and how strong that control is. Whether you’re analyzing intraday momentum or daily market cycles, the DMI can help you stay aligned with the prevailing market bias.
Looking to add it to your workflow? You can start by applying it to your next chart analysis in NinjaTrader when you open an account.
