Additional uses of the DMI indicator by Karen Jones Head of FICC Technical Analysis , Commerzbank

I have found the DMI indicator to be a useful tool. The more traditional way to use this index is in conjunction with an ADX signal above 20 (this tells you that a market is trending in the first place). You then buy if the +DI> -DI or sell if -DI>DI+. For a more extensive explanation of the DMI index please click here (description of DMI indicator).

However I have found additional ways to use this indicator. It can help to determine if a support or resistance level is likely to be breached. I watch the DMI index for CONFRMED buy and sell signals. These happen when the +DI or the –DI start to take out their previous peaks.

Here is an interesting example on the daily GBP/USD chart. The initial crossover of the +DI above the –DI happened on the 15th April 2015, however on the 16th April we saw the +DI (blue line) break above the previous peak on the –DI (the red peak). This gave us an early warning signal that there was an increased risk of a break above the 1.500 resistance. The break of this resistance was seen the next day and a close above this resistance level was seen on the 22nd April 2015. At this stage the ADX indicator was still below the 20.00 level – BUT it was rising.

16 Nov Blog Chart

In this particular example the confirmed buy signal got you into the trade pretty early – the ADX indicator did not break above 20 until the 27th April. However once this was seen (a confirmed signal+ ADX>20) this does give you an opportunity to add to the trade.

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About Nicole Elliott

Nicole Elliott

A graduate of the London School of Economics and Political Science (BSc Social Psychology) Nicole Elliott has worked in banks in the City of London for the last 30 years. Whether in sales, trading or forecasting technical analysis has always been the bedrock of her thinking. Key expertise lies within all areas of treasury: foreign exchange, money markets, fixed income and commodities.

She has also added to the body of knowledge of the industry writing the first western book on Ichimoku Cloud Charts. Strong media links and a cult following are due to her prescient calls on the markets and often entertaining format.

Nicole can be contacted at trending@sta-uk.org

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