DM (Directional Movement)

The Directional Movement (DM) indicator is a technical analysis tool developed by J. Welles Wilder to identify the directional movement of an asset's price. It helps traders determine trend strength and direction by measuring the difference between consecutive highs and lows. The indicator consists of positive and negative directional movement components that form the basis for the Directional Movement System.

Formula

+DM = Current High - Previous High (if positive, else 0)
-DM = Previous Low - Current Low (if positive, else 0)
Where:
+DM indicates upward price movement strength
-DM indicates downward price movement strength

How DM Works

The Directional Movement indicator compares current price highs and lows with previous periods to determine the dominant price direction. Positive DM measures upward price movement, while negative DM measures downward movement. These values are typically smoothed over a period (usually 14 days) and used to calculate the Directional Movement Index (DMI) and Average Directional Index (ADX).

Trading Strategies Using DM

Strategy Examples

Enter long positions when +DM crosses above -DM
Enter short positions when -DM crosses above +DM
Use DM crossovers with ADX confirmation
Monitor DM divergence from price action
Combine with moving averages for trend validation

Support and Resistance Strategy

Use DM readings to confirm breakout strength
Look for strong DM values at key price levels
Identify potential reversals using DM divergence
Combine with volume analysis at support/resistance
Use DM to validate level breaks or bounces

Trend Identification

Strong +DM indicates established uptrend
Strong -DM indicates established downtrend
Compare DM values across timeframes
Use DM strength to gauge trend momentum
Monitor DM convergence/divergence patterns

Advantages and Limitations

Advantages

Clear trend direction signals
Quantifies directional movement strength
Works in any timeframe
Effective for trend confirmation
Integrates well with other indicators

Limitations

Can lag in fast-moving markets
May give false signals in ranging markets
Requires confirmation from other indicators
Complex calculation methodology
Not suitable as standalone trading system

Best Practices When Using Directional Movement (DM)

Combine DM signals with other technical indicators for confirmation
Use multiple timeframes to validate directional movement signals
Wait for clear +DM/-DM crossovers before taking positions
Consider overall market context when interpreting DM signals
Monitor volume alongside DM for stronger confirmation
Look for divergences between price action and DM readings
Set appropriate stop-loss levels based on DM signal strength
Be cautious of signals during ranging or choppy markets
Use DM readings to help determine position sizing
Regularly review and adjust DM period settings based on market conditions