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DI signals are derived from crosses by the two lines. As you might have guessed, a Buy signal is generated when the +DI crosses up through the -DI. See the lower graph below – the +DI is represented by the green line, the -DI is represented by the red line.
As a follow-up to our ADX (Average Directional Index) page, the indicator which gauges the strength of an existing trend, we now move on to discuss the ADX’s components: the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI), their parameters, the signals they can generate, and when they can be used. As you may have noticed, the DI indicators appear in the two last columns of our daily screenings and can be looked at on their own as well as in conjunction with the ADX.
The +DI (positive directional indicator), normally green, measures the strength of recent positive/up moves. The -DI (negative directional indicator), normally red, measures the force of recent negative/down moves. The two lines are normally plotted on the same chart as the ADX (normally a thicker dark coloured line), which is a smoothed exponential average of the aforementioned DIs and thus fluctuates much less. The standard settings for DIs are 14 days, but as with most indicators and charting packages, different time periods can be used if the user wishes.
DI signals are derived from crosses by the two lines. As you might have guessed, a Buy signal is generated when the +DI crosses up through the -DI (strength of recent positive/up moves greater than negative moves). Likewise, Sell signals occur when -DI crosses up through +DI (force of recent negative/down moves greater than positive moves). As always, caution is required. When shares are in a defined trading range, crossover signals may be generated more regularly than usual, and many may ultimately prove to be whipsaws (false signals). With this in mind, it would be prudent to also take a look at the ADX. If rising towards 40, the ADX would be suggesting that any existing trend (up or down) is strengthening and that any DI crosses are more likely to prove genuine signals. If the ADX is falling from above 40, however, beware; the ADX is implying that any existing trend is weakening and that a trading range may be developing. Any DI cross signals may result in whipsaws.
Green Arrows: DI+ crossing above DI- (strength of positive/up moves stronger than negative/down moves)
Red Arrows: DI- crossing above DI+ (strength of negative/down moves stronger than positive/up moves)
ADX (trend strength) not indicating strong trend during any DI crosses, but shares clearly not trading in a range. It tends
to lag most of the DI crosses in the graph, except maybe the most recent negative cross.
Directional Indicators are another helpful indicator from the momentum toolbox, offering signals derived from the underlying share price. Their use helps increase the odds that a trade will ultimately prove profitable, by ensuring that momentum is in place. To date, our technicals’ caveats have highlighted the importance of respecting a share price’s current trend, and that pre-empting a move against the trend can often prove costly. Indicators like DI are always worth a look before making jumping.
As always, individual technical indicators should never be relied upon in isolation. An indicator should only be part of a trader’s decision making process. We always advise the interrogation of several indicators and price data (moving averages, trendlines, price, price patterns, support/resistance, volume) in order to assist with the final trading decision. While looking at too many indicators may prove counterproductive, the consultation of at least some should be considered essential before doing anything trade related.