Directional Movement System

The Core of the Directional Movement System

DMS is a specialized technical indicator designed to gauge the potentiality of price shifts, specifically those deviating from the preceding day's trading boundary. It's manifested through three distinctive lines:

• Positive Direction Indicator (+DI): Represents upward price momentum (visualized in green).

• Negative Direction Indicator (-DI): Captures downward price dynamics (depicted in red).

• Average Directional Movement Index (ADX): Serves as a barometer to distinguish between trending and ranging market scenarios (illustrated in blue).

When the upward thrust represented by +DI surpasses the downward force of -DI, it signifies a dominant bullish sentiment. Conversely, a dominant -DI suggests stronger bearish tendencies. Such nuances empower traders to infer possible trend trajectories. Line crossovers further refine trading signals, potentially signaling entry or exit points.

DMS vs. Aroon: A Comparative Insight

While both DMS and Aroon employ upward and downward indicators to depict trend directions, their core methodologies diverge:

• Aroon: Centrally hinges on the temporal intervals between peak and trough price levels.

• DMS: Prioritizes price disparities between consecutive highs and lows, making price, rather than time, its pivotal variable.

One notable strength of the DMS is its adaptability. While many indicators excel either in trending or ranging markets, DMS is adept at discerning market types and furnishing apt signals tailored to traders' strategies.

Deciphering the DMS Calculation

To glean insights from the DMS, the following computational steps are followed:

1. Today's Directional Movement Assessment:
   • +DM: Current High minus Prior Day's High (reflecting bullish price shifts).
   • -DM: Prior Day's Low minus Current Low (indicating bearish movements).

The Mutual Exclusivity of +DM and -DM

Within a given day, it's crucial to recognize that both positive directional movement (+DM) and negative directional movement (-DM) cannot coexist. This principle is governed by the nature of price movements:

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+DM = Today's High - Yesterday's High (when price moves upward)
-DM = Yesterday's Low - Today's Low (when price moves downward)

To further clarify:

• Outside Days: These represent heightened volatility with both +DM and -DM calculations resulting in positive values. In such scenarios, the more substantial of the two values is considered.

• Inside Days: When both calculations return negative values, the outcome defaults to zero, indicating a more stable price movement.

Computing the True Range

To establish the True Range for a specific day, consider the highest value among the following:

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Today's High - Today's Low,
Today's High - Yesterday's Close,

or

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Yesterday's Close - Today's Low

3. Implementing the 14-Day Smoothing Default

By default, the Directional Movement System in Mandala Margin employs a 14-day smoothing, elucidated as:

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+DM14 = [Exponential Moving Average]* of +DM
-DM14 = [Exponential Moving Average]* of -DM
TR14 = [Exponential Moving Average]* of True Range

4. Deriving the Directional Indicators

The Directional Indicators can be gauged as:

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+DI14 = +DM14/TR14
-DI14 = -DM14/TR14

5. Calculating the components of the Average Directional Movement Index (ADX):

Calculate the DI Difference:

• Record the difference between +DI14 and -DI14 as a positive number
• Calculate the Directional Index (DX): DX = DI Difference/[+DI14 + -DI14]
• Calculate the ADX: ADX = [Exponential Moving Average]* of DX

Application of the DMS

The Directional Movement System serves primarily as a guide to discern trend direction and trigger trading signals. Here are some key insights:

• Crossovers: A significant part of DMS signals:

  • An uptrend may be signaled when +DI crosses above -DI, suggesting a potential long trade.

  • Conversely, a downtrend might be flagged when -DI drops below +DI, hinting at a potential short trade.

• Trend Confirmation: The DMS can also validate or refute current trend directions:

  • A prevailing uptrend is confirmed when +DI surpasses -DI.

  • A strong downtrend is indicated when -DI eclipses +DI.

In Mandala Margin, the Directional Movement System is seamlessly integrated among the suite of built-in indicators. Dive into the Indicators section for a comprehensive guide on its application.

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