DI+ and DI- quantify directional movement. J. Welles Wilder Jr. developed these indicators as components of the Average Directional Index (ADX). DI+ measures upward price pressure. DI- measures downward price pressure. Traders use them to assess trend strength and direction.
The calculation of DI+ and DI- involves True Range (TR) and Directional Movement (DM). TR captures the largest of three values: current high minus current low, current high minus previous close absolute value, or current low minus previous close absolute value. This ensures volatility measurement accounts for gaps.
Directional Movement defines positive or negative movement. Positive Directional Movement (+DM) occurs when the current high exceeds the previous high, and the current low does not exceed the previous high. +DM is the current high minus the previous high. Negative Directional Movement (-DM) occurs when the current low falls below the previous low, and the current high does not fall below the previous low. -DM is the previous low minus the current low. If neither condition is met, or if both are met (an outside bar), then both +DM and -DM are zero. If an inside bar forms, both +DM and -DM are also zero.
After calculating +DM and -DM for each period, traders smooth these values, typically over 14 periods. The smoothed +DM is SUM(+DM) / 14. The smoothed -DM is SUM(-DM) / 14. Similarly, smoothed TR is SUM(TR) / 14.
Finally, DI+ and DI- are derived. DI+ equals (Smoothed +DM / Smoothed TR) * 100. DI- equals (Smoothed -DM / Smoothed TR) * 100. These values oscillate between 0 and 100.
A rising DI+ indicates increasing buying pressure. A rising DI- indicates increasing selling pressure. When DI+ crosses above DI-, it signals a potential bullish trend. When DI- crosses above DI+, it signals a potential bearish trend. The magnitude of the spread between DI+ and DI- suggests trend conviction. A wide spread indicates a strong trend. A narrow spread suggests consolidation or a weak trend.
Consider a 5-minute chart of ES futures. On a strong trending day, DI+ might surge from 20 to 60 while DI- remains below 15. This confirms a robust uptrend. Conversely, during a choppy, range-bound session, both DI+ and DI- might hover between 15 and 30, frequently crossing each other. This indicates indecision and a lack of clear direction.
Proprietary trading firms often integrate DI+ and DI- into their algorithmic strategies. High-frequency trading (HFT) algorithms use these indicators to filter out non-trending markets. An algorithm might only initiate long positions if DI+ is above 40 and DI- is below 20 on a 1-minute chart, simultaneously checking for confirmation on a 5-minute chart with similar conditions. This reduces false signals during sideways price action. Conversely, they might short NQ futures only when DI- exceeds 45 and DI+ is below 25.
DI+ and DI- excel in identifying trending markets. They provide objective measures of directional conviction. For instance, on a daily chart of AAPL, if DI+ remains above DI- for several weeks, with ADX (the third component, not discussed here, but critical) also rising above 25, it confirms a sustained uptrend. Traders can use this for swing trading or position sizing.
However, these indicators fail in choppy or range-bound markets. Frequent crossovers generate whipsaws, leading to multiple false signals and potential losses. During such periods, both DI+ and DI- often remain below 20-25, indicating a lack of strong directional conviction. For example, if SPY trades in a tight 0.5% range for two hours on a 15-minute chart, DI+ and DI- will likely oscillate closely, providing no actionable signals. A trader relying solely on DI+ and DI- crossovers would incur numerous small losses from premature entries and exits.
Another limitation arises during divergences. Price might make higher highs, but DI+ makes lower highs. This bearish divergence suggests weakening momentum, even if the price continues to rise. Similarly, a bullish divergence occurs when price makes lower lows, but DI- makes higher lows. This signals weakening selling pressure. These divergences are critical for experienced traders. They indicate potential trend reversals, but DI+ and DI- alone do not confirm the reversal. They merely flag a warning.
Consider a trade example using DI+ and DI- on a 5-minute chart of CL (Crude Oil futures).
Trade Example: CL Long Position
Context: The market has been consolidating for 30 minutes. DI+ and DI- have been intertwined, both below 25. Suddenly, a strong bullish candle forms, breaking above the consolidation range.
Entry Signal:
- Timeframe: 5-minute chart.
- Indicator State: DI+ crosses above DI- and both begin to rise. DI+ moves from 22 to 35. DI- drops from 23 to 18. This indicates a shift from consolidation to an emerging uptrend.
- Price Action: CL breaks above a resistance level of $78.50. A 5-minute candle closes strongly above this level.
Entry:
- Instrument: CL (Crude Oil futures).
- Entry Price: $78.60, immediately after the candle close confirming the breakout and DI+ crossover.
- Stop Loss: $78.30. This places the stop 30 ticks ($300 per contract) below the breakout level, just beneath the low of the breakout candle and within the previous consolidation range.
- Target: $79.50. This represents a 90-tick move ($900 per contract).
- Risk/Reward Ratio: (79.50 - 78.60) / (78.60 - 78.30) = 0.90 / 0.30 = 3:1.
- Position Size: Assuming a maximum risk of $600 per trade, the trader would take two contracts (2 contracts * $300/contract risk = $600).*
Trade Management:
- As CL moves higher, DI+ continues to rise, staying well above DI-. This confirms trend strength.
- The trader observes price action for signs of weakness. If DI+ starts to flatten or turn down, or if DI- begins to rise significantly, it indicates weakening momentum.
- CL reaches $79.20. DI+ is at 55, DI- is at 12. The trend remains strong.
- CL hits the target of $79.50. The trader exits both contracts.
Outcome:
- Profit: 2 contracts * ($79.50 - $78.60) * 1000 = 2 * $0.90 * 1000 = $1800.
When it Fails: Imagine the same setup, but after the entry at $78.60, CL rallies to $78.80, then reverses sharply. DI+ starts to fall, and DI- quickly rises, crossing above DI+. The price drops to $78.20, hitting the stop loss at $78.30. This scenario highlights the risk of false breakouts, even with DI confirmation. The initial DI+ surge might have been a temporary spike, not a sustained trend. The market quickly reverted to its choppy nature, or a new bearish impulse took over. This demonstrates that DI+ and DI- are not predictive; they are reactive. They confirm existing momentum.
Institutional traders utilize DI+ and DI- in conjunction with other indicators and market context. A large hedge fund running a systematic strategy might use DI+ and DI- on daily charts of global equities to identify long-term trends. Their algorithms might trigger rebalancing events in a portfolio. For example, if DI+ crosses above DI- on the daily chart of TSLA, and ADX is above 30, the algorithm might increase the allocation to TSLA by 50 basis points.
Conversely, if DI- crosses above DI+ on the daily chart of GC (Gold futures), and ADX is also rising, the algorithm might reduce gold exposure by 100 basis points. These are not short-term trading signals but rather tools for managing directional exposure in a large portfolio. They provide an objective, quantifiable measure of trend strength and direction, reducing subjective bias in allocation decisions.
Furthermore, market makers and liquidity providers might use DI+ and DI- to gauge market sentiment and adjust their bid-ask spreads. If DI+ is significantly higher than DI- on a 1-minute chart, indicating strong buying pressure, they might widen their bid-ask spread slightly on the offer side, expecting continued upward movement, or tighten it on the bid side to attract more sellers. This allows them to manage inventory risk more effectively.
DI+ and DI- are lagging indicators. They confirm what has already happened, not what will happen. This is a critical distinction. A strong DI+ reading means buying pressure has been dominant. It does not guarantee continued buying pressure. During rapid reversals, DI+ and DI- can be slow to react, leading to delayed exits or entries. For example, if NQ futures experience a sudden, sharp reversal from an uptrend, DI+
