Using DMI to identify the market trend
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Directional Movement Indicator (DMI)

Developed by J. Welles Wilder, the DMI minimizes the guesswork in spotting trends and helps confirm trendline analysis.

The DMI system has two parts:
ADX (average directional movement index). If the ADX reading is above 20, that indicates a "real" or sustainable trend. The ADX also measures the trend's strength: the >higher the ADX, the stronger the trend.

The ADX also provides an early indicator of a trend's end. When it drops from its highest level, it may be time to exit the position and wait for a fresh signal from the the DI+/DI-.

DI+ and DI- lines. When DI+ crosses up through DI-, that's considered a buy sign. When the opposite happens, that's usually a sell sign.

Wilder recommends following the "extreme point rule" to confirm the signals. Note the extreme point for that period in the direction of the crossover (the high if DI+ crosses up over DI-; the low if DI- crosses up over DI+). Only if that extreme point is breached in the subsequent period is a trade signal confirmed.
Many traders use the parabolic indicator along with the ADX to identify a trend's end. The parabolic indicator follows the price action but accelerates its own rate of increase over time and in response to the trend. The parabolic continually closes in on the price, and only a steadily accelerating price rise (the essence of a trend) will prevent the price from falling below the parabolic, signaling an end to the trend.

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