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Directional Movement indicator system

There are several strategies and techniques that may be used in analyzing trends to get the most out of trading profits. In any markets, trend analysis is very important and the same applies with forex markets. Currencies in the world have the propensity to move in trends because of the different macroeconomic factors such as global trade and interest rates, international policies, and effects of political movements.

Aside from the trend-line analysis, there is another tool in technical analysis that may be utilized to determine if there is a trend or not. This tool is called the directional movement indicator system or DMI. Just how this helps traders shall be discussed further in this article.

DMI was developed by Welles Wilder in his book New Concepts in Technical Trading System, first published in 1978. Wilder, and his book, has been called by trade review authors as the "grand daddy" of modern trading technical analysis. Online forex, softwares and training programs are largely based on his work. Wilder is a mechanical engineer by profession but after seven years of practice, he switched into real estate where he found his knack for trade and business.

In an interview, he was quoted as saying "I've found that the most important thing in trading is always doing the right thing whether or not you win or lose; I would go so far as to say that whether one makes money in the markets depends on whether or not one uses the proper money management - how much you make depends on where you enter and exit the markets."

DMI gives the trader assurance and complacency that he is not doing mere guesswork. DMI confirms the analysis made by trend-line and expounds on it. Average Directional Movement index (ADX) is used in DMI where a number product of over twenty-five (25) indicates a market trend and a reading of below twenty (20) indicates absence of trend. Aside from this, ADX also measures the potency of a trend. Meaning, there is higher strength if there is higher ADX, and vice versa. This helps traders decide if they will follow or not a certain trend.

Two lines - the DI+ and DI- lines are utilized to signify entry points. A trader is signaled to buy if the DI+ line crosses over ht DI- line. A DI- line over the DI+ line signifies that it is time for the trader to sell. There is also what we call the "extreme point rule" where proper attention must be given to points where the two DI lines meet. A matter of patience is needed on this because a trader has to really see where the next point over the DI lines meet.