Understanding the Negative Directional Indicator (-DI)
The Negative Directional Indicator, or -DI, is a component of the Average Directional Index (ADX) system that provides insights into market trends, specifically indicating the strength of a downtrend. This indicator is the darker, more brooding sibling of the Positive Directional Indicator (+DI), always rooting for the bears in the market party.
What is the -DI and How is it Calculated?
The -DI helps to measure the downturn momentum in the market. To calculate the -DI, you start with noting the negative directional movement (-DM), which is the difference between the previous low and the current low when it’s larger than the current high minus the previous high. Smooth this value over a given number of periods (typically 14) and then divide by the Average True Range (ATR), finally multiplying by 100 to get a percentage.
Practical Applications in Trading
- Trend Confirmation: An upward trending -DI line suggests a strengthening downtrend. When it crosses above the +DI, it’s a strong signal for the bears.
- Signal for Entry or Exit: A crossover of -DI above +DI may serve as a cue to consider short selling or exiting long positions.
- Comparative Analysis: When paired with +DI and the ADX line itself, -DI offers a comprehensive view of market trends, including their strength and potential shifts.
Theoretical Understanding Through Charts
Imagine a tug-of-war between bears and bulls. The -DI line is the force of the bears, tugging the rope downwards. When the -DI line bulks up and heaves above the +DI line, it signals the bears pulling harder than the bulls, indicating a strengthening downtrend.
Related Terms
- Positive Directional Indicator (+DI): Measures the presence of an uptrend; the opposite force to -DI.
- Average Directional Index (ADX): Shows the strength of a trend, derived from both +DI and -DI.
- True Range (TR): The most comprehensive range that a market moves in a single period, critical for calculating -DI.
Recommended Readings for Further Exploration
- “Technical Analysis of the Financial Markets” by John J. Murphy – A comprehensive guide covering all aspects of technical indicators including the ADX and -DI.
- “Trading for a Living” by Dr. Alexander Elder – Offers insights into trading psychology and various trading tools, including directional indicators.
Embark on your journey with the Negative Directional Indicator and let the bearish whispers guide your trading sails!
