What is the negative direction indicator (-DI)?
The negative directional indicator (-DI) measures the presence of a downward trend and is part of the average directional index (ADX). If -DI is on an upward slope, it is a sign that the downward trend in prices is strengthening. This indicator is almost always plotted with the positive directional indicator (+ DI).
Key points to remember
- -DI is part of a more comprehensive indicator called the Average Directional Index (ADX). The ADX reveals the direction and the strength of the trends.
- The indicator was designed by Welles Wilder for raw materials, it is used for other markets and over all periods.
- When the negative directional indicator (-DI) rises and is above the positive directional indicator (+ DI), the downward price trend becomes stronger.
- When -DI drops, and below + DI, the upward price trend is reinforced.
- When the crossover + DI and -DI, this indicates the possibility of a new trend. If -DI exceeds + DI, a new downward trend could start.
The formula for the negative directional indicator (-DI) is
The-DI=ATRS -DMTheor:-DM=Negative directional movement-DM=Low priority–Current lowS -DM=-DM smoothedS -DM=t=t–14ΣtThe-DM–(14Σt=t–14tThe-DMThe)+Current -DMATR=Average true rangeTheThe
How to calculate the negative directional indicator (+ DI)
- Calculate -DI by finding -DM and True Range (TR).
- -DM = Previous bass – Current bass
- Any period is counted as -DM if the previous low – current low> current high – previous high. Use + DM when Current High – Previous High> Previous Low – Current Low.
- TR is the highest value between the high current – low current, the high current – previous closing or the low current – previous closing.
- Smooth the 14 periods of -DM and TR using the formula below. Replace TR with -DM to calculate the ATR. [The calculation below shows a smoothed TR formula, which is slightly different than the official ATR formula. Either formula can be used, but use one consistently].
- -DM at first 14 periods = sum of the first 14 readings at -DM.
- Next -DM value of 14 periods = First 14 -DM value – (Before 14 DM / 14) + Current -DM
- Then divide the smoothed -DM value by the smoothed TR (or ATR) value to get -DI. Multiply by 100.
What does the negative direction indicator (-DI) tell you?
The -DI line is used in conjunction with the + DI line to help show the direction of the trend.
When -DI is greater than + DI, the trend is downward, or at least the downward movement recently exceeds the upward movement. If + DI is greater than -DI, then the trend is upward, or the upward movement in prices has recently outpaced the downward movement in prices.
Since these two lines can indicate the direction of the trend, crosses are sometimes used as trading signals. Crossing -DI above + DI signals a drop in price, and is therefore a sale or short trade signal. A buy signal occurs if the + DI exceeds -DI.
These indicators are part of the medium directional index system (ADX). The addition of the ADX line, which is a smoothed average of the difference between + DI and -DI, helps traders to see how strong the current trend is. Typically, readings greater than 20 on the ADX, and especially above 25, show that a strong trend is present.
Traders can use all elements of the ADX system to make better trading decisions. For example, the lines + DI and -DI indicate the direction of the trend and the crossings. The ADX shows the strength of the trend, so a trader may decide to take long trades only when the ADX is greater than 20 and the + DI is greater or crossing the -DI.
The differences between the negative directional indicator (-DI) and a moving average
A moving average takes the average price of an asset over a defined period of time. The negative directional indicator (-DI) relates only to the previous minimum compared to the current minimum, if applicable. For this reason, -DI is not an average, although it can sometimes seem to follow the price when the price drops. Due to the different calculations of the two indicators, the -DI and the moving average will provide the trader with different information.
Limits of using the negative directional indicator (-DI)
The -DI alone provides limited information. It is much more useful when combined with the + DI line. By examining the relationship between the two lines, traders can better assess whether the upward or downward price movement is stronger.
Since traders often examine the relationship between these two lines and crosses, it should be noted that the lines + DI and -DI can cross frequently. This can lead to whips. The whipsaws are when the lines cross, triggering transactions, but the price of the asset does not follow and the trader loses money.
Savvy investors use other forms of fundamental analysis to confirm what the DI lines suggest.