The Positive Directional Indicator (+DI) is a key component of technical analysis used to measure the upward price movement of a financial asset. It is part of the Directional Movement System created by J. Welles Wilder, which is primarily used to identify directional trends and their strength in the market.
How Does the +DI Work?
The +DI is calculated based on the differences between the high prices of the current and previous trading days. Essentially, it captures the magnitude of upward movements in price relative to the overall price movement.
Formula
The Positive Directional Indicator is computed as follows:
where:
- \( \text{+DM} \) (Positive Directional Movement) = Today’s High - Yesterday’s High (if positive)
- \( \text{ATR} \) (Average True Range) = average of the true range over a specified period
Interpretation
A rising +DI suggests strengthening upward momentum, while a decreasing +DI can imply a weakening upward trend or the onset of a downward trend. In practice, a trader might look for crossovers between the +DI and other indicators (e.g., the Negative Directional Indicator (-DI)) as potential buy or sell signals.
Types of Applications
Trend Identification
By analyzing the +DI, traders can identify when a bullish trend is developing or gaining strength. This is crucial for making informed trading decisions and optimizing entry and exit points.
Signal Generation
The +DI is often used in conjunction with other indicators like the -DI and the Average Directional Index (ADX) to generate trading signals. For example, when the +DI crosses above the -DI, it can be a signal to buy.
Comparison with Other Indicators
While the +DI alone provides valuable insights, combining it with other indicators enhances its utility. For instance, the ADX helps confirm the strength of the trend indicated by the +DI.
Example Calculation
Let’s consider a stock whose highs over three consecutive days are $105, $107, and $110.
-
Positive Directional Movement (+DM):
$$ \text{Day 1 to Day 2} : 107 - 105 = +2 $$$$ \text{Day 2 to Day 3} : 110 - 107 = +3 $$ -
Average True Range (ATR) assumed: 5
-
Smoothed +DM: (Assume a smoothing period of 14 days)
$$ \text{Smoothed +DM}_{(new)} = (\text{Smoothed +DM}_{\text{(previous)}} \times 13 + \text{Current +DM}) / 14 $$ -
Calculate +DI:
$$ \text{+DI} = \left( \frac{3}{5} \right) \times 100 = 60 $$
Historical Context
J. Welles Wilder introduced the Directional Movement System, including the +DI, in his 1978 book “New Concepts in Technical Trading Systems.” His work has become foundational in the field of technical analysis, providing traders with robust tools to understand market trends and dynamics.
FAQs
What is the significance of the +DI?
Can the +DI be used for all types of trading assets?
How do traders use +DI crossovers?
Summary
The Positive Directional Indicator (+DI) is an essential tool in technical analysis used to measure and identify upward price movements in various markets. By providing quantitative insights into upward trends, the +DI assists traders in making well-informed decisions. When used in conjunction with other directional indicators, it offers substantial value in developing effective trading strategies.
References
- Wilder, J. W. (1978). New Concepts in Technical Trading Systems. Trend Research.
- Murphy, J. J. (1999). Technical Analysis of the Financial Markets. New York Institute of Finance.
This structured guide aims to offer a comprehensive understanding of the Positive Directional Indicator (+DI) and enhance your trading success through well-informed market analysis.