Directional Movement         

Directional Movement, +DI, -DI, DX, ADX, ADXR

The Directional Movement Indicator is used to identify trends in the prices of securities. It is often used in conjunction with trend-following systems such as the Parabolic SAR.

The Directional Movement system uses the interrelationships of several indicators in the identification of trends. The Positive Directional Indicator (+DI) provides a measure of buying pressure. The Negative Directional Indicator (-DI) measures selling pressure. These are plotted as lines, and when +DI is above -DI, it is a bullish signal and the crossover of +DI above -DI was the buying signal. When +DI is below -DI, it is a bearish signal and the crossover of +DI below -DI was a selling signal. However, it is not a reliable signal if DI crosses and recrosses in rapid succession. Wait for the sawtooth pattern to end before initiating a new position based on trend.

The Average Directional Index (ADX) measures the spread between +DI and -DI. When ADX moves above 20, it indicates a real trend. When ADX moves past 40, it is an indication that the trend is strong, but the trend could be nearing an end. When ADX peaks above 40 and starts declining, it may be time to take your profits. When ADX moves below 40, it shows that the trend is losing strenth and could presage a trading range. Whenever ADX is declining, it indicates the trend is weakening. When ADX rises above both +DI and -DI, it is a cautionary indication of overheating and profits should be taken on a downturn from that high level. When ADX is below both +DI and -DI, it indicates a lifeless market; it is not the time to be using a trend following system.

For a more detailed description of Directional Movement, read New Concepts in Technical Trading Systems by J. Welles Wilder Jr.

You can increase your profits in option trading by considering both fundamental analysis and technical analysis. When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

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