What is the Positive Directional Indicator (+DI)?
The Positive Directional Indicator (+DI) is a component of the Average Directional Index (ADX) and is used to measure the presence of an uptrend. When the +DI is sloping upward, it is a signal that the uptrend is getting stronger. This indicator is nearly always plotted along with the Negative Directional Indicator (-DI).
- The +DI is a component within the Average Directional Index (ADX). The ADX is designed to show trend direction as well as trend strength.
- Designed by Welles Wilder for commodity charts on the daily frame, it can be used for other markets or timeframes as well.
- When the Positive Directional Indicator (+DI) is moving up, and above the Negative Directional Indicator (-DI), then the price uptrend is strengthening.
- When the +DI is moving down, and below the -DI, then the price downtrend is strengthening.
- Crossovers between the +DI and -DI are sometimes used as trade signals as the crossover indicates the possibility of a new trend emerging. For example, the +DI crossing above the -DI signals the possibility of a new uptrend and a potential long position.
The Formula for the Positive Directional Indicator (+DI) is
+DM = Current High - Previous High
Smoothed +DM = sum 14 periods of +DM - (sum of 14 periods +DM / 14) + Current +DM
ATR = Average True Range
How to Calculate the Positive Directional Indicator (+DI)
- Calculate +DI by finding +DM and True Range (TR).
- +DM = Current High - Previous High.
- Any period is counted as a +DM if the Current High - Previous High > Previous Low - Current Low. Use -DM when Previous Low - Current Low > Current High - Previous High.
- TR is the greater of the Current High - Current Low, Current High - Previous Close, or Current Low - Previous Close.
- Smooth the 14-periods of +DM and TR using the formula below. Substitute TR for +DM to calculate ATR. [The calculation below shows a smoothed TR formula, which is slightly different than the official ATR formula. Either formula can be used, but use one consistently].
- First 14-period +DM = Sum of first 14 +DM readings.
- Next 14-period +DM value = First 14 +DM value - (Prior 14 DM/14) + Current +DM
- Next, divide the smoothed +DM value by the ATR value to get +DI. Multiply by 100.
What Does the Positive Directional Indicator (+DI) Tell You?
Traders will typically follow the position of +DI versus -DI. When +DI is greater than -DI there is said to be a bullish trend. Thus, when +DI crosses above -DI it signals the potential for a new price uptrend.
When -DI is above +DI the price is in a bearish trend. When -DI crosses above +DI it could signal the start of a downtrend in price.
The +DI and -DI, combined, are called the Directional Movement Index (DMI). This system can be enhanced by the addition of the Average Directional Index (ADX).
ADX shows the strength of a trend. Wilder reported that a strong trend can be evident when the Average Directional Index is greater than 20, and especially 25.
In this way, all the lines can be used together. When the ADX is above 20, and the +DI is above (or crossing) -DI then long trades should be favored. When ADX is above 20 and the -DI is above (or crossing) +DI then short trades should be favored.
The Differences Between the Positive Directional Indicator (+DI) and a Moving Average
While the +DI tracks positive price movements, there are several differences between it and a moving average. A moving average is the average price of an asset over a set time period. The +DI is only factoring the current high minus the prior high, when applicable. Due to the calculation differences, a moving average will provide different information to a trader than the +DI.
Limitations of Using the Positive Directional Indicator (+DI)
Used on its own, the +DI indicator doesn't reveal much. In order to provide value, its combined with the Negative Directional Indicator (-DI). This way, traders can gauge which direction has more force and also spot crossovers which may signal new trends.
A third line, called the ADX, is also often added. This line shows trend strength by taking a smoothed average of the difference between +DI and -DI.
Even with these additional lines, the indicator can still produce faulty signals. Crossovers may occur but no trend in price develops. Also, the indicator is looking at historical prices and therefore isn't necessarily predictive of where prices will go next.