DEFINITION of 'Wilder's DMI (ADX)'

Wilder’s DMI (ADX) consists of three indicators that measure a trend’s strength and direction. Three lines compose the Direction Movement Index (DMI): ADX (black line), DI+ (green line) and DI- (red line). The Average Directional Index (ADX) line shows the strength of the trend. The higher the ADX value, the stronger the trend.

The Plus Direction Indicator (DI+) and Minus Direction Indicator (DI-) show the current price direction. When the DI+ is above DI-, current price momentum is up. When the DI- is above DI+, current price momentum is down.

                        Example of Wilder's DMI (ADX)

Image depicting an example of Wilder's DMI (ADX).

 

BREAKING DOWN 'Wilder's DMI (ADX)'

Wilder’s DMI, developed by J. Welles Wilder in 1978, shows the strength of a trend- either up or down. According to Wilder, a trend is present when the ADX is above 25. DMI values range between zero and 100.

If DI+ is above DI-, an ADX reading of 25 or higher indicates a strong uptrend. If DI- is above DI+, an ADX reading of 25 or higher indicates a strong downtrend. The ADX may stay above 25 even when the trend reverses. Since ADX is non-directional, this shows the reversal is as strong as the prior trend. Traders may find readings other than 25 are better suited to indicate a strong trend in certain markets. For example, a trader might find that an ADX reading of 20 provides an earlier indication that the price of a security is trending. Conservative traders may want to wait for readings of 30 or above before employing trend following strategies. (To learn more, see: DMI Points the Way to Profits.)

Trading with Wilder’s DMI

DI Crossovers: Traders could enter a long position when the DI+ line crosses above the DI- line and set a stop-loss order under the current day’s low. When the DI- line crosses above the DI+ line, traders could place a short position with a stop above the high of the current day. Traders could use a trailing stop if the trade moves in their favor to help lock in profits.

Irrespective of whether the trader takes a long or short position, the ADX should be over 25 when the crossover occurs to confirm the trend’s strength. When the ADX is below 20, traders should use trading strategies that exploit range bound conditions.

DI Contractions and Expansions: The DI+ and DI- line move away from each other when price volatility increases and converge toward each other when volatility decreases. Short-term traders could enter trades when the two lines move apart to take advantage of increasing volatility. Swing traders might accumulate into a position when the lines contact in anticipation of a breakout.

Traders should use Wilder's DMI in conjunction with other technical indicators and price action to increases the probability of making profitable trades. (For further reading, see: Technical Analysis: Indicators and Oscillators.)

RELATED TERMS
  1. Average Directional Index - ADX

    The average directional index (ADX) is an indicator of objective ...
  2. Disability-Income (DI) Insurance

    Disability income (DI) insurance provides supplementary income ...
  3. Parabolic Indicator

    The parabolic indicator, developed by J. Wells Wilder, is used ...
  4. Average True Range - ATR

    The average true range - ATR is a technical analysis indicator ...
  5. False Signal

    In technical analysis, a false signal refers to an indication ...
  6. Basing

    Basing refers to a period in which a stock or other traded security ...
Related Articles
  1. Trading

    The ADX Shows Strong Uptrends In These 4 Stocks

    The ADX shows trend direction as well as the strength of the trend. Right now, it's signaling strong trends in these four stocks.
  2. Trading

    Finding Market Movement With The ADX

    Take a closer look at this indicator, which refines your insight into the strength of a prevailing trend.
  3. Tech

    The Most Important Technical Indicators For Binary Options

    Trading binary options is not for the novice, but if you're ready to delve in, get to know the best technical indicators.
  4. Trading

    Netflix Stock Is at a Crucial Pivot Point

    Technical signs point to continued weakness for Netflix stock, but a move above a key level could push it higher.
  5. Trading

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  6. Trading

    Measure Volatility With Average True Range

    Find more profitable entry and exit locations with this standard indicator.
RELATED FAQS
  1. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
  2. What are the best technical indicators to complement the Exponential Moving Average ...

    Utilize additional technical indicators to complement and improve a basic trading strategy that relies on exponential moving ... Read Answer >>
  3. What common strategy do traders implement when using the money flow indicator?

    Learn a common trading strategy traders implement with the money flow indicator to identify profitable trade entry and exit ... Read Answer >>
Trading Center