The Directional Movement Indicator (DMI) is a tool that helps traders figure out whether the market is moving up, down, or sideways, it comes with a formula.

If you want to succeed in Forex trading, you need to understand how to spot strong trends.

But how does it work? What is the Directional Movement Indicator formula that makes this tool so effective?

In this guide, I will explain the formula in a way that anyone can understand, even if you are just starting in Forex trading. 

By the time you finish reading, you will know how to use DMI to improve your trades and avoid costly mistakes.

What is the Directional Movement Indicator (DMI)?

Before we get into the formula, let’s first understand what the Directional Movement Indicator (DMI) is.

The DMI is a trading indicator developed by J. Welles Wilder Jr. in 1978. It helps traders figure out whether a currency pair is in an uptrend, downtrend, or moving sideways.

DMI has three main parts:

• +DI (Positive Directional Indicator): Measures bullish (upward) movement.
• -DI (Negative Directional Indicator): Measures bearish (downward) movement.
• ADX (Average Directional Index): Shows the strength of the trend.

For example

If you are trading EUR/USD and +DI is above -DI, it means the price is in an uptrend. If -DI is above +DI, it means the price is in a downtrend.

Now, let’s look at the formula behind the Directional Movement Indicator.

What is the Best Combination of the ADX Indicator?

The best ADX combinations depend on your strategy:

1. For Trend Trading

ADX + Moving Averages: Confirms trend direction and strength.
ADX + MACD: Confirms trend and momentum for entry signals.

2. For Reversal Trading

ADX + RSI: Identifies trend reversals by spotting overbought/oversold conditions.
ADX + Bollinger Bands: Detects price breakouts.

3. For Scalping & Day Trading

ADX + Stochastic Oscillator: Gives quick entry/exit signals.
ADX + Price Action (Candlestick Patterns): Confirms market strength before entering trades.

The Directional Movement Indicator (DMI) Formula

The DMI formula is made up of several steps. I will break it down into simple steps so you can understand how it works.

Step 1: Calculate the Directional Movement (DM)

Positive Directional Movement (+DM) = Current High – Previous High

Negative Directional Movement (-DM) = Previous Low – Current Low

Only one of these values will be used at a time:

If +DM is greater than -DM, use +DM and set -DM to zero.

If -DM is greater than +DM, use -DM and set +DM to zero.

For example

For instance yesterday’s EUR/USD price

High: 1.1050

Low: 1.1000

Today’s price

High: 1.1080

Low: 1.1015

+DM = 1.1080 – 1.1050 = 0.0030

-DM = 1.1000 – 1.1015 = -0.0015

Since +DM (0.0030) is greater than -DM (-0.0015), we keep +DM and set -DM to zero.

Step 2: Calculate the True Range (TR)

The True Range (TR) measures the volatility of the market. It is the largest of these three values:

Current High – Current Low

Current High – Previous Close

And Current Low – Previous Close

If the values are:

Current High: 1.1080

Current Low: 1.1015

Previous Close: 1.1050

We calculate:

1.1080 – 1.1015 = 0.0065

1.1080 – 1.1050 = 0.0030

1.1050 – 1.1015 = 0.0035

The largest value is 0.0065, so the True Range = 0.0065.

Step 3: Calculate the Directional Indicators (+DI and -DI)

Now, we calculate:

+DI = (Smoothed +DM / Smoothed TR) × 100

-DI = (Smoothed -DM / Smoothed TR) × 100

This gives the percentage strength of the uptrend and downtrend.

Step 4: Calculate the ADX (Average Directional Index)

The ADX shows whether the trend is strong or weak. It is calculated as:

ADX = (Sum of DI Difference / Sum of DI Sum) × 100

If ADX is above 25, the trend is strong.

If ADX is below 20, the trend is weak.

How Do I Start Trading Using ADX?

Follow these simple steps to trade with the ADX indicator:

Step 1: Add ADX to Your Chart

Open your trading platform (MT4, MT5, or TradingView) and insert the ADX indicator (default setting: 14).

Step 2: Identify the Trend Strength

If ADX > 25, look for trading opportunities.

If ADX < 20, avoid trading (weak trend).

Step 3: Confirm the Trend Direction

If +DI is above -DI, look for buy opportunities.

If -DI is above +DI, look for sell opportunities.

Step 4: Enter a Trade

For Buy Trades: ADX > 25 and +DI crosses above -DI.

For Sell Trades: ADX > 25 and -DI crosses above +DI.

Step 5: Set Stop Loss and Take Profit

Place a Stop Loss below recent support (for buy trades) or above recent resistance (for sell trades).

Use a 1:2 Risk-Reward Ratio to maximize profits.

If trading EUR/USD and ADX is 30, with +DI crossing above -DI, enter a buy trade and set stop loss below support level.

Pros and Cons of Using the DMI in Forex Trading

DMI has advantages and as well as drawbacks:

Pros

• Helps traders identify strong trends.
• Works well with other indicators like RSI, MACD, and Moving Averages.
• Helps avoid false signals in weak markets.

Cons

• Can be confusing for beginners.
• Sometimes gives late signals.
• Best used with other indicators for confirmation.

What is the Best Setting for the Directional Movement Index (DMI)?

The best setting for the DMI depends on your trading style. The default setting is 14 periods, but traders adjust it based on their needs.

Swing Traders: Use 14 or 20 periods for better long-term trends.
Day Traders: Use 7 to 10 periods for quicker signals.
Scalpers: Use 5 periods for fast reactions to market changes.

Combine DMI with RSI (Relative Strength Index) or Moving Averages to improve accuracy.

FAQs

How do you use the Directional Movement Indicator in trading?

• You use +DI and -DI to check the direction of the market. If +DI is above -DI, look for buy opportunities. If -DI is above +DI, look for sell opportunities.

Is ADX the same as DMI?

• No. ADX is part of DMI, but it only measures trend strength, not direction.

Can I use DMI alone?

• DMI works best when combined with RSI, MACD, or Moving Averages for better accuracy.

What is the best ADX setting for Forex trading?

• The default ADX setting is 14, but some traders use 20 or 25 for faster signals.

What is the Best ADX Setting for Day Trading?

• For day trading, the best ADX settings are:
  ADX Period: 7 to 10 – Provides faster signals.
  Trading Timeframe: 15-minute (M15) or 1-hour (H1) – Gives reliable signals.
  Entry Signal: Look for ADX > 25 with a +DI/-DI crossover.

Conclusion

Now you know the Directional Movement Indicator formula and how to use it in Forex trading.

+DI shows upward strength, -DI shows downward strength, ADX tells you if the trend is strong or weak, DMI works best with other indicators like RSI and MACD

By learning the DMI formula, you can make smarter trading decisions and increase your profits in the Forex market.