The Directional Movement Index (DX) was developed by J. Welles Wilder to evaluate the strength of a trend and define periods of sideway trading. The Directional Movement Index is a raw version of the ADX (Average Directional Index), which is calculated as an exponential moving average from DX. The Directional Movement Index can be used in technical analysis in the same way as ADX to determine whether the market is trending or trading (moving sideways).
Directional Movement Index calculations are based on the positive Directional Index (+DI) and negative Directional Index (-DI). You can see an example of the detailed calculation in the ADX description. The Directional Movement Index is a ratio of the absolute value of the difference between directional indexes and the sum of directional indexes. It is calculated by use of the following formula:
[DX] = (|[+DI] - [-DI]|) / ([+DI] + [-DI]) * 100
In most cases, the Directional Movement Index appears in charts as ADX (Average Directional Movement Index) combined with positive and negative directional indexes.
In addition to being able to use DX or ADX to define the strength of a trend, you can use positive and negative directional indexes to generate signals. In its most basic form, buy and sell signals can be generated by +DI and -DI crossovers.
In technical analysis, a buy signal is considered to occur when +DI moves above -DI and a sell signal when -DI moves above the +DI. However, traders should be aware that, when an analyzed security is in a trading range (ADX or DX is below 20), the trading system may produce many false signals and whipsaws.
As with most technical indicators, +DI and -DI crosses should be used in conjunction with other aspects of technical analysis. Since Directional Index is based on the price, we recommend that a volume-based technical analysis be used as a partner to this indicator in a trading system.
