Understanding DI+ and DI- in Trend Analysis
Directional Indicators, specifically DI+ and DI-, quantify price movement in a specific direction. Welles Wilder developed these components as part of the Average Directional Index (ADX). DI+ measures the strength of upward price movement; DI- measures the strength of downward price movement. These indicators do not predict future price direction. They confirm the presence and strength of a trend. Traders use them in conjunction with ADX to evaluate trend conviction and potential reversals.
A 14-period setting is standard for DI+ and DI-. This period balances sensitivity and lag. Shorter periods, like 7, increase sensitivity, generating more signals but also more noise. Longer periods, such as 21 or 28, reduce noise but introduce greater lag, delaying signal generation. Institutional traders often experiment with these settings based on asset volatility and trading strategy. For instance, a high-frequency trading algorithm might use a 5-period DI+ and DI- on a 1-minute chart for ES futures, seeking rapid trend confirmation for scalp entries. A longer-term swing trader might employ a 20-period setting on a daily chart for SPY, focusing on sustained directional momentum.
Calculating DI+ and DI- involves several steps. First, determine the True Range (TR). TR is the greatest of:
- Current High - Current Low
- Absolute value of Current High - Previous Close
- Absolute value of Current Low - Previous Close
Next, calculate the Positive Directional Movement (DM+) and Negative Directional Movement (DM-). DM+ occurs when the Current High > Previous High AND Current High - Previous High > Previous Low - Current Low. In this case, DM+ = Current High - Previous High. Otherwise, DM+ = 0. DM- occurs when the Current Low < Previous Low AND Previous Low - Current Low > Current High - Previous High. In this case, DM- = Previous Low - Current Low. Otherwise, DM- = 0. Crucially, DM+ and DM- cannot both be positive in the same period. If both conditions are met, the larger value takes precedence, and the smaller is set to zero.
After calculating DM+, DM-, and TR for each period, smooth these values over the chosen lookback period (e.g., 14 periods). The smoothing method is typically an Exponential Moving Average (EMA) or a Wilder's Smoothing Average. Smoothed DM+ = (Previous Smoothed DM+ * (N-1) + Current DM+) / N Smoothed DM- = (Previous Smoothed DM- * (N-1) + Current DM-) / N Smoothed TR = (Previous Smoothed TR * (N-1) + Current TR) / N Where N is the lookback period (e.g., 14).*
Finally, calculate DI+ and DI-: DI+ = (Smoothed DM+ / Smoothed TR) * 100 DI- = (Smoothed DM- / Smoothed TR) * 100
These values oscillate between 0 and 100. A DI+ value of 30 means 30% of the average true range over the last N periods was positive directional movement. A DI- value of 25 means 25% was negative directional movement.
Proprietary trading firms integrate DI+ and DI- into their algorithmic trading strategies. An algorithm might scan for DI+ crossing above DI- on a 5-minute chart for NQ futures, combined with ADX rising above 25. This confluence signals a strengthening uptrend, prompting long entry signals. Conversely, a DI- crossing above DI+ with ADX above 25 indicates a strengthening downtrend, generating short entry signals. These algorithms often include additional filters, such as volume confirmation or price action patterns, to reduce false positives. For example, a DI+ crossover might only trigger if the current 5-minute volume exceeds the 20-period average volume by 1.5x.
Trading Strategies with DI+ and DI-
Traders primarily use DI+ and DI- for trend identification and entry/exit signals. The core principle involves observing the crossover between the two lines.
Trend Confirmation: When DI+ is above DI-, it indicates buyers control the market. The trend is upward. The greater the separation between DI+ and DI-, the stronger the uptrend. For instance, if DI+ reads 45 and DI- reads 15 on a 15-minute chart for AAPL, it suggests a robust bullish trend. Conversely, when DI- is above DI+, sellers dominate. The trend is downward. A DI- of 40 and DI+ of 10 on a 15-minute chart for TSLA points to a strong bearish trend.
Crossover Signals: A bullish crossover occurs when DI+ crosses above DI-. This signals a potential shift from a downtrend or consolidation to an uptrend. Traders interpret this as a buy signal. A bearish crossover occurs when DI- crosses above DI+. This signals a potential shift from an uptrend or consolidation to a downtrend. Traders interpret this as a sell signal.
Consider a trade example on CL (Crude Oil Futures). On a 15-minute chart, CL trades sideways between $78.00 and $78.50 for two hours. DI+ hovers around 18, and DI- hovers around 17, with ADX below 20, confirming the range. At 10:30 AM EST, CL prints a strong bullish candle, breaking above $78.50. Simultaneously, DI+ crosses above DI-. DI+ rises to 28, and DI- drops to 12. ADX begins to tick up from 19 to 21. This confluence suggests a nascent uptrend.
Trade Entry: A trader enters a long position at $78.60, immediately after the 15-minute candle closes above the range and the DI+ crossover confirms. Stop Loss: The stop loss is placed below the recent swing low and the breakout level, at $78.30. This defines a risk of $0.30 per contract. Target: The target is set at $79.50, based on previous resistance levels or a 1.5R target ($0.45 profit for $0.30 risk). This provides a 3:1 R:R ratio. Position Sizing: With a 1% risk per trade on a $100,000 account, the maximum risk is $1,000. Each CL contract has a $10 per tick value, so a $0.30 stop loss means $300 risk per contract. The trader can take 3 contracts ($1000 / $300 = 3.33, rounded down to 3). Outcome: CL continues its upward move. DI+ continues to rise, reaching 35, while DI- falls to 8. ADX climbs to 28, confirming the trend strength. CL hits $79.50 within the next hour. The trade closes for a profit of $0.90 per contract, totaling $2,700 for 3 contracts.
Conversely, a bearish crossover on GC (Gold Futures) could trigger a short trade. On a 5-minute chart, GC shows an uptrend, with DI+ at 38 and DI- at 15, and ADX at 30. GC trades near $2,050. At 11:00 AM EST, GC prints a large bearish candle, dropping from $2,050 to $2,045. DI- crosses above DI+. DI- jumps to 32, and DI+ falls to 20. ADX dips slightly but remains above 25. This indicates a potential trend reversal or strong pullback.
Trade Entry: A trader enters a short position at $2,044.80, after the 5-minute candle close and the DI- crossover. Stop Loss: The stop loss is placed above the recent swing high, at $2,047.80. This defines a risk of $3.00 per contract. Target: The target is set at $2,038.80, a 2:1 R:R ($6.00 profit for $3.00 risk). Position Sizing: With a $3.00 stop loss, and $10 per tick, each contract risk is $300. The trader takes 3 contracts. Outcome: GC continues to decline. DI- rises further to 36, and DI+ drops to 15. ADX rises again to 27. GC hits $2,038.80. The trade closes for a profit of $6.00 per contract, totaling $1,800 for 3 contracts.
Limitations and Institutional Context
DI+ and DI- are effective trend-following indicators, but they have limitations.
Lagging Nature: Like all indicators derived from past price data, DI+ and DI- are lagging. Crossover signals often occur after a significant portion of the trend has already unfolded. This lag can reduce profit potential or increase risk if entries are delayed. For example, a DI+ crossover on a daily chart for SPY might confirm an uptrend after SPY has already moved 5% from its
