The Directional Movement Index (developed by Wilder) is useful with a conservative strategy of trading only in strongly trending markets and avoiding trades when the market is moving sideways. The Directional Movement Indicator is useful for distinguishing strong trends from sideways behaviour.

The DMI indicator is made up of three plots; the difference between today's high and yesterday's high is the up movement or D+, the difference between today's low and yesterday's low is the down directional movement or D-. Finally, the Directional Index is calculated by taking the averages of the D+ and the D- and dividing them by the average true range.

A D+ (up movement) above the D- (down movement) indicates an upward trending market while a D- below the D+ indicates a downward trending market. The DMI measures the amount of trend, not its direction.

A rising DMI indicates a strong trend is underway and suggests that trend-following strategies are in order. A DMI of 15 to 20 is considered indicative of a trending market. Familiarity with the levels of trend strength helps you decide when certain other indicators can be appropriately used.

For example, a falling DMI indicates a trend-less market when time cyclical and overbought/oversold indicators prove more effective than the trend following techniques.

References

Wilder, J. W. New Concepts in Technical Trading Systems.