MetaStock Directional Movement Function

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The Directional Movement indicators measure the strength of a prevailing trend as well as determining whether movement exists in the market. Consequently, the directional movement system is best used for either of the following:

§ As a stand alone trend following system, or

§ To determine if a security is trending or not; and if so, employ other trend following indicators and if not, either decide not trade the security or employ other non trend following indicators.

There are actually 3 parts which make up the directional movement indicators. These are the Directional Movement Index (DX); the Plus Directional Indicator (+DI); and the Minus Directional Indicator (-DI).

CALCULATION

The math behind the Directional Movement Indicators can be overwhelming and is outside the scope of this Study Guide. Understanding these calculations however, is not imperative. Instead, be aware that the Directional Movement Indicators denote trend strength.

The directional movement system is displayed on charts with three main indicators, i.e. the +DI, the _DI and the DX lines. The basic trading system involves first identifying that a stock is trending, indicated by the DX line moving upwards. Then the +DI and the _DI are plotted on top of each other. When the +DI rises above the -DI, it is a bullish sign; and a bearish signal occurs when the +DI (PDI(Periods)) falls below the -DI (MDI(Periods)).

SYNTAX ADX(Periods)

Periods _ This specifies how many periods are used to calculate the average of the directional movement index.

EXAMPLE

The following formula obtains the value of the 14 period Average Directional Movement:

ADX(14)

In the above example:

Periods = 14

APPLICATION

A more useful application of this example could be:

ADX(14)>20 AND ADX(14)>Ref(ADX(14),-1)

This formula specifies that the value of the Average Directional Movement must be greater than 20. 

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