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The plus and minus directional indicators are calculated by looking at the smoothed averages and are used to verify the direction of the trend. The DMI is positive when the present price minus the previous high is bigger than the previous low minus the current low. As a result, this index is usually the same as the current high minus the previous high if it is positive.

The negative DMI is the opposite of that. It happens when the previous low minus the current low is bigger than the current high minus the previous high. Having a good understanding of the theoretical foundation of the DMI is a good thing.

However, it is not a requirement that you know it. What you need to know is how to apply it on the market. The most common method of using the indicator is to know the strength of a trend. As such, it is only used when there is a trend and cannot be used in a ranging market.

The most common interpretation is to look at the ADX number. If the number is above 25, it is usually an indication that a trend is strong. When the ADX number is 20 and below, Wilder suggested that there is no strong trend. You can adjust these numbers to fit your style. We know many traders who use 30 as the base number to show a trend. We now have an alignment of the trend in two time frames and the strength of the trend is enough to boost the bullish momentum, which increases your chances of having a profitable trade.

How to Measure Trend?

Also, read the simple yet profitable strategy. When you only take those trading opportunities that have higher odds of success, you preserve your account balance. Preserving your capital should always be your number one priority if you want to have long-term success in this business. This brings us to the next important step we need to establish for our DMI trading strategy, which is where to place our protective stop loss. The most effective way to protect your trade is to place your stop loss below the most recent swing low.

A breakout below will simply invalidate the trade so we want to be out of that position. An ADX reading of 40 indicates that the trend is overextended and we should now expect the trend to lose its bullish momentum.

The ADX is a good filter to measure not just when the trend is the strongest, but also when the trend is running out of gas. The ADX indicator is a powerful tool on its own. It can help us determine when the buyers or the sellers are exhausted and the trend is about to reverse. Use the same rules for a SELL trade — but in reverse. In the figure below, you can see an actual SELL trade example.

The first major objective you have as a trader, no matter your trading style, is to find the market direction. In order to make a profit trading the markets, you need to market to continue moving in the direction of your trade after you opened a position. We also have training for building a foundation before a forex strategy matters. The DMI forex trading strategy can assist you in finding the trend direction as well as the strength of that trend. Please leave a comment below if you have any questions about how to use the DMI indicator!

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Please Share this Trading Strategy Below and keep it for your own personal use! Thanks, Traders! We specialize in teaching traders of all skill levels how to trade stocks, options, forex, cryptocurrencies, commodities, and more. Our mission is to address the lack of good information for market traders and to simplify trading education by giving readers a detailed plan with step-by-step rules to follow.

Forex Trading for Beginners. Shooting Star Candle Strategy. We can now run a quick back-test to see how our strategy performs. Since the past 3 months has been one hell of ride for the Bitcoin market with the CoViD situation and Bitcoin Halving around, running one over the past 3 trending months using a tick cycle of 12H gives us pretty convincing results with a Sharpe Ratio of 2. The Directional Movement System indicator calculations are complex, interpretation is straightforward, and successful implementation takes practice.

Setting an ADX requirement will reduce signals, but this uber-smoothed indicator tends to filter as many good signals as bad. By applying the ADX indicator trading rules one can take advantage of the strength of the trend and cash in quick profits. The bottom line is that the best profits come from catching strong trends and the best ADX strategy can help you accomplish your trading goals.

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