For a trader or investor, it is very important in timing the entry to a stocks. And one technique to know that is to know the trend. You have to know if it is in downtrend or up trend. Seeing the price alone to know the trend is sometimes not enough. You have to combine it with another indicator.
And one of the good indicator to know the trend is DMI (Directional Movement Index). It was created by J. Welles Wilder back in 1978, who have created also the relative strength index (RSI).
DMI will help you decide when to buy and sell stocks. It has differentiate the strong and weak trend giving the trader to enter only on the strong one.
DMI composed of three lines: 1. ADX (Average Directional Index), 2. +DI (Plus Directional Indicator), 3. –DI (Minus Directional Indicator).
On the above picture, ADX is the white line, +DI with green and –DI with red line. Let’s discuss the three lines one by one.
The ADX line will not tell you the direction, only the trend strength. It will give you only if the stock is trending. If it is 30 or above, it is trending, but it will not tell if down or up.
And that’s +DI and –DI comes in. To give you the direction of the trend. If the +DI is above the –DI, it is in up trend. On the reverse side, if the +DI is below the –DI, it is in down trend.
The three lines will be used together to complete the DMI reading and get the full benefit of it.
HINT: Look for ADX with 30 or above and +DI and –DI that are far apart from each other to determine if it is good up trend or not.
We have discuss the philosophy behind the DMI, let’s put that in real world. Below is the example:
Above is all time monthly chart of URC. At the mid of 2009, price was around 15 per share. +DI/-DI cross over and green (+DI) went above the red (-DI) and the ADX is above 30.
Take a look what happen to its price, it goes as high as P234 per share on the first month of 2015. From P15 per share on 2009 to P234 per share on 2015. That was 1,460% price increase within 6 years or 243% per year.
Hope this help you in your trading and investing.
To your next winning stocks,
PS – please share so that other will know.