What is 'Negative Directional Indicator (-DI)'

A negative directional indicator is a component of the average directional index (ADX) that is used to measure the presence of a downtrend. When the -DI is sloping upward, it is a signal that the strength of the downtrend is increasing. This indicator is almost always plotted with the positive directional indicator (+DI).

BREAKING DOWN 'Negative Directional Indicator (-DI)'

Many traders will watch for the negative directional indicator (-DI) to cross above the positive directional indicator (+DI), which signals the beginning of a new downtrend. The -DI is a key factor used in the calculation of the popular average directional index (ADX). In 1987, J. Welles Wilder developed the Average Directional Index (ADX) as an indicator of trend strength. He developed ADX with commodities and daily prices in mind, but it can also be applied to stocks. ADX quantifies the velocity of price regardless of its north/south/eastward movement.

From a mathematics perspective, a negative directional indicator exists when the difference in a security's low price for two periods is bigger than the difference in the security's high price over the same two periods. Intuitively, this means a negative directional indicator occurs when:

(Prior Low Price - Current Low Price) > (Current High Price - Prior High Price)

As an example, consider the hypothetical Company XYZ. All stocks in Company XYZ's industry have been declining in value over the last week, and trader John isn’t sure if the trend has enough strength to warrant shorting some Company XYZ stock. To determine the answer, John calculates the negative directional indicator for Company XYZ.

The full formula for calculating Negative DI is:

L = daily low, H = daily high, TR = the True Range for the day, and NDM = negative directional movement.

The Importance of Negative Directional Indicators

Most investors and traders can tell whether a security is trending up or down, but it's also important to know when a trend is sustainable. This is why so many technical analysts turn to the DI. Though the math is complex, the idea is that when a negative DI rises above a positive DI, many analysts interpret this as a sign that a new downtrend is beginning, thus making it a sell signal. Likewise, a buy signal occurs when a negative DI falls below a positive DI.

It is important to note, however, that positive and negative DIs intersect frequently. Thus, DI interpretations do not prevent whipsaws. Smart investors will always use other forms of technical and fundamental analysis to confirm what negative DI is suggesting.

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