How to Calculate the Positive Directional Indicator

Are you trying to spot an uptrend before it really gets going? 

The Positive Directional Indicator, also called +DI, aims to show when prices go significantly up. It is an essential instrument for determining the right time to purchase a stock, currency or different asset. The +DI, created by the well-known technical trader Welles Wilder, is frequently combined with additional indicators for confirming trend directions.

Let’s dive into how the +DI is calculated, how to interpret it, and how to use it in your own trading.

Exploring the Positive Directional Indicator

The +DI is a vital part of the Directional Movement System. This system includes various tools created by Welles Wilder to evaluate which way and how strong market prices are moving. The purpose of the +DI is to detect when and how much prices go up, so traders can use this information to take advantage of rising trends in the market.

The +DI works when it looks at the gap between today’s highest value and yesterday’s. It matters a lot if today’s high is bigger than yesterday’s. We then make this difference smoother over a period chosen by the user, usually 14 days, to reduce market random movements and give us a better sense of where the trend is heading. The figure we get shows as a percent of the full price range during that time, capturing both how much prices moved and in which way they went.

Within Wilder’s Directional Movement System, the +DI works together with the Negative Directional Indicator, or -DI. They help traders understand not only if there is a trend but also how strong it is when looking at upward movements against downward ones. The system has the Average Directional Index too, or ADX for short. It combines what +DI and -DI tell us to gauge how strong a market trend is without caring if it’s going up or down.

Grasping how the +DI works and its usefulness is very important for traders who use technical analysis because it gives a clear indication of when the market is moving up. When traders add the +DI to their methods for trading, they can choose better moments to buy or sell, especially when they need strong evidence that prices are likely going higher.

By using the +DI, traders can measure when a market is probably going to keep rising and also manage their money more effectively according to these trends. This helps them increase possible earnings and reduce risks that come with unclear market changes.

Mechanics of the Positive Directional Indicator

The +DI, a component of the Directional Movement System by Welles Wilder, is beneficial in measuring the direction and strength of market trends. It concentrates on how strong prices move upwards which helps interpret movements that imply ascending market situations.

The formula for the +DI is based on what we call directional movement. We say that there’s a positive directional movement when today’s highest value minus yesterday’s highest value is larger than the difference between yesterday’s lowest and today’s lowest values, providing this result comes out as more than zero. This calculation shows how buyers can increase prices higher than before, showing a strong trend upwards.

After finding out the positive Directional Movement, we usually smooth it by averaging over a typical period like 14 days. We do this smoothing with techniques that Wilder developed and they are quite close to what is used in exponential moving averages. The reason for making it smoother is to lessen the impact of quick ups and downs so that we get a better signal about long-term upward trends.

To find the +DI, one must take the smooth positive directional movement (+DM) and put it against the Average True Range (ATR) that shows volatility. You calculate +DI by dividing smooth +DM with ATR, after which you multiply this number by 100 to turn it into a percent value. The percentage shows the +DI and tells us how much of the total price movement is going up, giving a clear indication of how strong the bullish trend is.

When traders watch the changes in the +DI, they can see early clues that a strong upward trend is getting stronger and more stable. If the +DI goes up, it usually means there are more people wanting to buy which might show a powerful rise coming. On the other hand, if the +DI is going down, it might show that the strong upward trend is getting weaker and this could be a sign that there will soon be a change in the direction of prices or a period of consolidation.

Knowing how the +DI works is important for traders using technical analysis to decide when to enter and leave markets. If they read the +DI signals correctly, traders can place their trades in a way that takes advantage of likely rising trends and stays away from spots where upward movement isn’t strong.

Insights Provided by +DI

The Positive Directional Indicator, or +DI for short, is an essential tool used in technical analysis to deeply understand how strong and lasting the upward trends are in the market. It belongs to the Directional Movement System and assists traders by showing them the force of price changes and measuring buyer enthusiasm.

At the center, +DI measures if prices that go up are getting stronger or weaker, very important for knowing if upward trends will keep going. If the +DI number goes higher, it means more people want to buy and it looks like the trend is becoming stronger. This usually happens when traders feel sure and ready to spend more money, making the market go up even more. On the other hand, a falling +DI might show that positive energy is getting less, which could mean a change in trend or the upward movement slowing down.

The +DI is very useful for telling the difference between ordinary price changes and important shifts in trends. For example, when the market is unstable, if the +DI stays high it can suggest that even with prices moving up and down a lot, there is still a strong feeling that prices will go up overall. This understanding helps traders to decide with more information, if they think about starting a new trade or keeping an existing one because they expect the price will keep going up.

Additionally, the usefulness of +DI gets better when you look at it together with -DI. When you compare +DI and -DI, it can show possible clashes or agreements between buyers’ and sellers’ forces. A greater +DI compared to the negative one typically indicates a strong upward market trend, giving traders more assurance in their strategies favoring rising prices.

Nevertheless, for traders, it is very important to look at the +DI while also taking into account the general market situation and different technical indicators. The +DI works best when you use it together with information about trading volume, resistance levels – those stubborn horizontal lines where prices may struggle to break through – and various other analysis instruments that can confirm what its signals suggest. When traders combine the +DI with a full analysis of the market, they can find the best times to buy and sell, which helps them increase their chances of making money when the market is going up.

This signal’s skill in interpreting the movements of the market makes it a very valuable aid for anyone who wants to use technical analysis to identify and follow trends. Knowing what +DI shows can assist not only in finding chances to make money but also help prevent mistakes from wrong interpretation of market changes because of not analyzing fully.

Calculating the +DI

The +DI is found by using a special calculation. This includes different important parts that help to measure how the price of a stock moves in an upward direction. To do this calculation, it looks at the highs that follow each other and sees how much they change over a certain amount of time, which is usually connected with what we call the True Range of the stock. Here’s a step-by-step breakdown of how to calculate the +DI:

First step is to find directional movements. The Positive Directional Movement, or +DM, happens when the difference between today’s highest point and yesterday’s highest point is bigger than the difference from yesterday’s lowest point to today’s lowest one. The difference has to be positive. If it is not like this, then +DM equals zero.

True Range (TR): The True Range is the greatest of the following:

• Current high minus the current low.
• Absolute value of the current high minus the previous close.
• Absolute value of the current low minus the previous close.
• This part assists in grasping the fluctuation and real highest to lowest span of the trading day.

For making smooth true range and directional movements smooth, people often use a 14-day average. This method starts with adding the first 14 periods of positive Directional Movements and True Ranges together. After that, each day they take away the total from the previous day and put in the value for today.

To calculate the +DI, you take the smoothed plus Directional Movement that’s averaged over 14 days and divide it by the True Range which is also smoothed for 14 days to make these numbers comparable. Then, you multiply this outcome by one hundred so that it becomes a percent value. This percentage represents the +DI.

Example Calculation:

• Assume that in a period of 14 days, the total for Smoothed +DM is 150 points and for Smoothed True Range it is 1200 points.
• +DI=(150 / 1200) × 100 = 12.5%
• The +DI result of 12.5% shows how strong the upward movement in price is compared to all price movements during that time, giving us an understanding of the market’s bullish power. Traders search for moments when the +DI goes up a lot because this might mean that there is a stronger trend upwards happening.

Knowing the way to figure out +DI is very important for traders using technical analysis to choose wisely. It measures how much prices go up compared to all price movements, and this helps a lot in spotting strong upward trends and good times when you might want to buy in the market.

Positive Directional Indicator (+DI) vs. Moving Averages

The Positive Directional Indicator (+DI) and the moving averages, they are very important when you do technical analysis. They have different jobs and give different kinds of understanding about how the market is moving. If you know what makes them different and how one can help with the other, it will make a trader’s plan better.

Similarities

The +DI showing above the -DI means that the bullish trend is getting stronger and it might be a good time to consider buying. Similarly, when the moving average goes up, it shows that there is an upward trend which gives more strength to buy signals that are in agreement with the +DI.

Usage:

• DI is very important in cases where the strength of trends helps to make choices about trading, especially good for strategies that follow trends or go for breakouts when markets have obvious directions.
• Moving averages are adaptable and useful in different market situations. They make price movements smoother to show overall trends of the market, and you can change them for various trading approaches, like short day trading activities or holding investments for a longer time.

Differences

Nature of Indicators:

• +DI, which is a part of the Directional Movement System, measures how strong an upward price trend is and pays attention to both direction and momentum by looking at differences in consecutive highs.
• Moving Averages make price data from a certain time more even, giving us a simple picture of the market’s overall trend but not measuring power or exact direction.

Usage:

• +DI is very good at recognizing when prices start to go up by checking how strong the upward price movement is. If you use it together with the Negative Directional Indicator (-DI), you can understand better if there are more people wanting to buy or sell.
• Moving Averages are useful for finding support and resistance levels, indicating possible changes in trend when prices go over these averages. They can be used in markets that are either trending or moving sideways, providing flexible support or resistance.

Conclusion:

Both +DI and moving averages help in understanding market trends, but +DI gives particular details about the strength and lasting nature of upward trends, while moving averages give a wider view based on past data. When traders use these tools together, they improve their skills to confirm trends and better their trading plans.

Practical Application: +DI in Action

The Positive Directional Indicator, or +DI, is very important for those who do technical trading. It helps a lot by giving signals that are easy to understand about the direction and power of market trends. We look at how to use this tool with the Dow’s ETF (DJI) as an example and observe how it does in 2024 for practical understanding.

Case Study: The Dow’s ETF Bull Run and Subsequent Correction

During the beginning months of 2024, the stock market with big indices such as S&P 500 and Nasdaq experienced a strong positive trend. They reached new top levels at February’s end, marking their best performance in almost ten years. In this time frame, the positive direction indicator for DJI demonstrated considerable increase which indicated a powerful growth tendency. Traders monitoring the +DI could have capitalized on this momentum by taking long positions.

With the start of March, the increase kept going stronger as new highs were reached by S&P 500 and Nasdaq, showing a solid upward push in the market which was shown also by a growing positive Directional Indicator.

But by the time April came, the situation changed a lot. The Dow fell down 570 points when the month was finishing, and this was its biggest drop since September 2022. The sharp decrease showed in the +DI starting to go down, indicating that strong buying force was getting weaker and hinting at traders to get ready for a possible market drop.

Below is the DJI graph from January to May 2024, featuring the DMI which includes both the +DI and -DI: 

Dow Jones Industrial Average (DJI) with DMI Indicators, Jan-May 2024

Although there was a decline in April, the market recovered fast. In the beginning of May, after a positive report on April’s employment that increased expectations for a reduction in interest rates by the Feds, the Dow went up over 400 points. The recovery could be seen in the positive DI, which started going up again, showing that there was more buying and a comeback of confident feelings from buyers.

Conclusion:

The case study shows how well the +DI works for moving through different times in the market, like starting to buy when trends go up and getting signs to sell before things might turn around. When traders add +DI to their ways of doing things, they can choose better and improve their results when markets are going up or changing a lot. This example shows not just the advantages of applying +DI but also emphasizes how crucial it is to respond quickly when this active indicator gives signals.

Advantages and Limitations

The +DI, which is a part of the Directional Movement System, gives traders important information about market momentum and how strong trends are. While this indicator has benefits, it also has limitations that traders need to think about.

Advantages:

• +DI’s main advantage is confirming that bullish trends are real and strong. When traders look at +DI next to the -DI, they can see if there’s more buying happening, which helps them decide when to buy for a longer time.
• Risk Management: The +DI is useful to improve how we manage risk because it indicates when might be good times to enter or leave trades. If the +DI goes higher than the -DI, this hints that starting a long position or keeping current ones could be wise since the market appears to have strong upward movement.
• Flexibility: The +DI can work together with different tools for technical analysis to make better predictions. If you use it with things like the Average Directional Index (ADX) that checks how strong a trend is, or Moving Averages which give more proof of trends, then your trading approach becomes stronger.

Limitations:

• The positive Directional Indicator, the +DI, often comes after the market has already shown its direction, making it a lagging indicator. It works best when prices are clearly moving up or down. When there is not much change in price or things are stable in the market, this indicator may give wrong hints that can be misunderstood.
• In markets with a lot of price changes, the +DI might give false signals. When prices move quickly, it can make the +DI go higher than the -DI for a short time and indicate that there is an uptrend starting when this trend may not last long. This situation could cause traders to start trading too soon.
• The success of the +DI often depends much on the period settings selected for making calculations. Should these settings not match with how the market is or what the trader plans, it could cause wrong analysis and bad choices in trades.

To sum up, the +DI is a valuable tool for recognizing and validating upward market trends. However, its effectiveness increases when used in conjunction with other indicators and methods of analysis, such as stock alerts, which can help traders quickly respond to changes highlighted by the +DI. Understanding its workings and applying it correctly is crucial to leveraging its capabilities in various market situations.

Conclusion

The Positive Directional Indicator, or +DI, is very important for people who analyze and trade using technical methods because it gives useful insight into market directions and energy. It helps to see how strong the upward trends are, which is essential for traders who want to find the best times to enter or leave a market that is showing consistent movement in one direction. Yet, as with all indicators, the +DI works best when combined with other technical instruments and information for a complete analysis and good choices in decision-making.

While the +DI offers good advantages, like showing possible chances when markets trend upwards, traders need to be careful about its limits, especially in unstable or flat markets. If traders use the +DI along with other indicators and change their methods based on current market situations, they can get better at making accurate analysis and have more success in their trading choices.

To summarize, the +DI is not only for trend analysis; it plays various roles in a wider strategy of financial market planning. Knowing how to use it correctly and what its limits are is very important for those who want to use technical analysis well in their trading activities.

Positive Directional Indicator: FAQs

How Does the Positive Directional Indicator Help in Trend Analysis?

The Positive Directional Indicator (+DI) helps to analyze trends by checking how strong the price moves up. It calculates how well prices go higher each time compared to past times, aiding traders in recognizing when a bullish trend starts and if it can continue.

Is It Possible to Use +DI Alone as an Indicator, or is It Better to Pair It with Additional Indicators?

The +DI can give useful information by itself, but it is usually better when combined with other indicators. If you use +DI together with the -DI and the Average Directional Index, or ADX, it can make clearer how strong a trend is and which way it’s going, so your decisions about this could be more precise.

What are the Typical Threshold Values for +DI to Indicate Strong Bullish Trends?

Often, when the +DI value goes over 25, it shows a strong upward trend in the market. But these numbers might change with different markets and how much they move up and down; so people who trade may set these values differently by looking at past data and what’s happening in the market now.

How Can a Trader Distinguish between False Signals and Genuine +DI Indications?

To tell the difference between not real and real +DI signs, traders must check with extra indicators and study methods. It is good to match +DI changes with the amount of trades data, averages of moving prices, and how prices move to ensure that what +DI shows is correct and decrease chances of making decisions based on wrong signals.

Is +DI Applicable to All Market Types and Time Frames?

The +DI is usable in many market kinds, like stocks, forex and goods. It works well for different time lengths too. But how good it works can change with the market’s liquidity and how much the prices move around. Traders must modify the settings of +DI and combine it with additional tools like the ones we’ve mentioned, as well as others like the accumulation distribution indicator or ultimate indicator for example.