STA Blog

I have found the DMI indicator to be a useful tool. The more traditional way to use this index is in conjunction with an ADX signal above 20 (this tells you that a market is trending in the first place). You then buy if the +DI> -DI or sell if -DI>DI+. For a more extensive explanation of the DMI index please click here (description of DMI indicator).

However I have found additional ways to use this indicator. It can help to determine if a support or resistance level is likely to be breached. I watch the DMI index for CONFRMED buy and sell signals. These happen when the +DI or the –DI start to take out their previous peaks.

Here is an interesting example on the daily GBP/USD chart. The initial crossover of the +DI above the –DI happened on the 15^th April 2015, however on the 16^th April we saw the +DI (blue line) break above the previous peak on the –DI (the red peak). This gave us an early warning signal that there was an increased risk of a break above the 1.500 resistance. The break of this resistance was seen the next day and a close above this resistance level was seen on the 22^nd April 2015. At this stage the ADX indicator was still below the 20.00 level – BUT it was rising.

In this particular example the confirmed buy signal got you into the trade pretty early – the ADX indicator did not break above 20 until the 27^th April. However once this was seen (a confirmed signal+ ADX>20) this does give you an opportunity to add to the trade.