The Average Directional Index (ADX) quantifies trend strength. While ADX itself measures magnitude, its components, the Positive Directional Indicator (DI+) and Negative Directional Indicator (DI-), reveal direction. DI+ measures upward price movement. DI- measures downward price movement. When DI+ crosses above DI-, it signals increasing bullish momentum. When DI- crosses above DI+, it signals increasing bearish momentum. Traders often combine DI+ and DI- crossovers with ADX readings to confirm trend presence and direction.
Calculating DI+ and DI-
Understanding the calculation clarifies how DI+ and DI- isolate directional movement. The core components are True Range (TR), Positive Directional Movement (+DM), and Negative Directional Movement (-DM).
True Range (TR) captures the greatest of three values:
- Current High minus Current Low
- Absolute value of Current High minus Previous Close
- Absolute value of Current Low minus Previous Close
This ensures TR accounts for gaps.
Positive Directional Movement (+DM) occurs when the current high exceeds the previous high AND the current low does not fall below the previous low. +DM = Current High - Previous High (if Current High > Previous High and Current Low > Previous Low) Otherwise, +DM = 0.
Negative Directional Movement (-DM) occurs when the current low falls below the previous low AND the current high does not exceed the previous high. -DM = Previous Low - Current Low (if Current Low < Previous Low and Current High < Previous High) Otherwise, -DM = 0.
If both conditions are met (Current High > Previous High and Current Low < Previous Low), then both +DM and -DM are 0. This filters out inside bars and bars with no clear directional bias.
Next, we smooth these values, typically over 14 periods, to create Average True Range (ATR), Average Positive Directional Movement (ADX+DM), and Average Negative Directional Movement (ADX-DM).
ADX+DM = (Previous ADX+DM * 13 + Current +DM) / 14 ADX-DM = (Previous ADX-DM * 13 + Current -DM) / 14 ATR = (Previous ATR * 13 + Current TR) / 14*
Finally, DI+ and DI- are calculated: DI+ = (ADX+DM / ATR) * 100 DI- = (ADX-DM / ATR) * 100
These lines fluctuate between 0 and 100. Higher values indicate stronger directional movement in that specific direction.
Interpreting DI+ and DI- Crossovers
The primary signal from DI+ and DI- is their crossover. A bullish crossover occurs when DI+ crosses above DI-. A bearish crossover occurs when DI- crosses above DI+.
Consider the ES futures contract on a 5-minute chart. On March 12, 2024, at 9:35 AM ET, ES trades at 5175. DI+ stands at 28, DI- at 35. Over the next 15 minutes, ES consolidates. At 9:50 AM ET, ES breaks higher. DI+ rises to 42, DI- falls to 29. DI+ crosses above DI-. This crossover signals increasing bullish momentum. An ADX reading above 25 confirms a trend is present. If ADX reads 30 at this crossover, it strengthens the bullish signal. Traders might consider long positions.
Conversely, on April 5, 2024, NQ futures on a 15-minute chart show NQ at 18050 at 10:00 AM ET. DI+ is 32, DI- is 25. NQ begins a sustained sell-off. By 10:45 AM ET, NQ trades at 17980. DI- rises to 40, DI+ falls to 28. DI- crosses above DI+. If ADX simultaneously rises from 20 to 30, it confirms bearish momentum. This setup presents a short opportunity.
Proprietary trading firms often use DI+ and DI- in conjunction with other indicators within their algorithmic frameworks. High-frequency trading (HFT) algorithms monitor these crossovers on sub-minute timeframes (e.g., 1-second, 5-second) to detect immediate shifts in order flow dominance. When DI+ rapidly crosses DI- on these granular timeframes, it can trigger buy programs. Conversely, a DI- crossover above DI+ can trigger sell programs. These algorithms do not solely rely on DI crossovers but integrate them as one component in a multi-factor model assessing momentum, volume, and volatility. For instance, a DI+ crossover on a 1-minute chart, accompanied by a spike in volume and a VIX reading below 15, might trigger a larger long position in SPY for an institutional algorithm.
Trade Example: NQ Long
Let's examine a specific trade using DI+ and DI- on NQ futures. Date: May 15, 2024 Timeframe: 5-minute chart Context: NQ has been consolidating for 30 minutes, ADX is below 20, indicating no strong trend. Observation 1: At 10:10 AM ET, NQ trades at 18250. DI+ is at 18, DI- is at 22. ADX is at 17. Observation 2: Over the next 15 minutes, NQ makes higher lows. At 10:25 AM ET, NQ breaks above resistance at 18265. Signal: At 10:25 AM ET, DI+ crosses above DI-. DI+ reads 35, DI- reads 20. ADX simultaneously rises to 28, confirming trend emergence. Entry: Long NQ at 18270, immediately after the 10:25 AM candle close and DI+ crossover. Stop Loss: Place stop below the recent swing low and below the 10:25 AM candle low, at 18245. This provides 25 points of risk. Target: Aim for a 2R target. 2R * 25 points = 50 points. Target price = 18270 + 50 = 18320. Position Size: Assuming a 1% risk per trade on a $100,000 account, risk is $1,000. Each NQ point is $20. So, $1,000 / $20 = 50 points. Risking 25 points per contract means $1,000 / 25 points = 40 points. $1,000 / (25 points * $20/point) = 2 contracts. R:R Ratio: 2:1. Outcome: NQ continues its upward move. At 10:50 AM ET, NQ reaches 18325, hitting the target. Profit: 50 points * 2 contracts * $20/point = $2,000.
This example illustrates how a DI+ crossover, confirmed by rising ADX, provides a clear entry signal. The stop loss placement respects market structure, and the target aligns with a favorable risk-reward profile.
Limitations and Failure Modes
DI+ and DI- are not infallible. Their effectiveness diminishes in certain market conditions.
1. Choppy, Sideways Markets: When a market consolidates in a tight range, DI+ and DI- generate frequent, whipsaw crossovers. For instance, if TSLA trades between $170 and $172 for an hour on a 1-minute chart, DI+ and DI- might cross back and forth multiple times. ADX often remains below 20 during these periods, signaling a lack of trend. Trading these crossovers without ADX confirmation leads to multiple small losses. A prop trader's algorithm would filter out signals where ADX is below a predefined threshold, perhaps 20 or 25, to avoid these false positives.
2. Lagging Indicator: DI+ and DI- are derived from past price data, making them lagging indicators. By the time a clear crossover occurs, a significant portion of the move might already be complete. For example, on a daily chart for AAPL, a DI+ crossover might confirm a bullish trend after AAPL has already rallied 5-7% from its lows. Aggressive traders might miss the initial, most profitable part of the move. For this reason, institutional traders often combine DI with leading indicators like order flow analysis or volume profile to anticipate shifts. A large block order appearing on the tape for CL futures, coupled with a DI+ rising but not yet crossing DI-, could signal an impending bullish move before the official crossover.
3. Divergence Issues: Sometimes, price makes new highs, but DI+ fails to make a new high. This bearish divergence suggests weakening upward momentum, even if price continues to climb. Conversely, if price makes new lows but DI- fails to make new lows, it indicates weakening downward momentum. These divergences can precede reversals. For instance, if GC futures on a 15-minute chart print a new high at $2350, but DI+ only reaches 60 while its previous high was 75, it suggests the
