Technical Analysis: A Forgotten, But Useful Indicator

When we typically think of technical analysis, we think of Bollinger Bands, moving average convergence divergence (MACD), relative strength (RSI), Williams’ %R, moving averages, and a host of other strong indicators.

Unfortunately, more often than not, we overlook the Directional Movement Indicator, or DMI spikes, which are used to assess price direction and strength, and can help serve as confirmation to other indicators, like RSI. 

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It can also tell us when to go long and when to go short because it differentiates between strong and weak trends.  It consists of three parts.  One, is the +DI, which represents upward directional movement.  The second is –DI, which indicates downward pressure.  Then there’s the ADX, which represents the average directional movement of the stock in question. 

For us, we like to look for spikes in the red or blue lines to indicate oversold or overbought rubber band characteristics.  In short, when you think of a stock, think of it like a rubber band.  You can only pull a rubber band so far before it snaps back to the mean.

Well, DMI can help us do just that.  For example, here’s s chart of Apple with DMI.

Notice what happens when the DMI blue line moves or spikes above the red line.  It can indicate an overbought condition, leading to a potential reversal up to 80% of the time.  Now reverse things.  Notice what happens when the red line spikes above the blue line.  Now we have a potential oversold condition that’s likely to reverse shortly.

Unfortunately, there’s no such thing as the Holy Grail of Trading.  It’s why we always tell you to confirm, confirm and confirm again with other indicators.  The last thing you ever want to do is strictly rely on a sole indicator.  That’s a great way to lose money 100% of the time.

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Learn Simple, High Probability Setups from Pro Traders. Prove Your 
Mastery of Their Strategies and Get Paid To Trade! Learn How Here

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