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Strategies & Market Trends : TA-Quotes Plus
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To: Follies who wrote (2163)10/6/1997 4:29:00 PM
From: Mike Hagerty   of 11149
 
This is probably more than you want to know !! Copied from Equity Analytics site:

This is part of a larger Technical Analysis site provided by Equity Analytics, Ltd.

Directional Movement was developed by Welles Wilder and is explained in his book "New Concepts in Technical Trading Systems". The indicator is used to determine if a security is 'trending' or if it is not trending. After all, except for some option strategies, one would normally want to buy a stock that is trending upward or short a stock which is trending downward. There's no way I'm going to provide the formula for this indicator here. It's just too complicated and long. The only real way to use this indicator is with a computer and technical analysis software.

What is important to know is how to use DMI and what you see when you put it on your screen. DMI has three significant lines. They are the +DI, the -DI, and the ADX, lines. Wilder suggests that the user buys when the +DI crosses above the -DI. He suggests selling when the +DI crosses below the -DI. ADX is a smoothed version of the directional movement.

Wilder also uses what he calls the 'extreme point rule'. Don't buy or sell on the day the +DI crosses above or below the -DI. Rather, note the high or low of the day. Then, wait to execute the trade until on a subsequent day the price reaches either the high or low depending on whether the stock is moving up or down.

Colby and Meyers found that 11 weeks was the optimal length for evaluating weekly data. They also found that this indicator is very good for risk adverse traders. I like to use 30 days as the time frame for daily data. I find on daily data that shorter time frames tend to give too many whipsaw signals.
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