Directional Movement Index: How it Works?
Directional movement index is displayed with two curves - green showing the strength of the buyers and red showing the strength of the sellers. ADX curve which can be applied onto the DMI indicator is so called average directional movement index and is basically the moving average of DMI indicator. DMI speed is defined with period setting, and the common settings for DMI period are level 14 or 15. If the ADX is above certain level (for example above 40 on 15 period setting) we can expect a trend development. If the ADX is below level 20 for example, we are looking at non-volatile market.
RSI is an oscillator, which means it moves (oscillates) between the levels of 0 and 100. The default period setting for RSI is 14. Most commonly used are periods from 10 to 14, regardless of the time frame. Lower period settings will give more overbought and oversold signals and higher period settings will give less signals, however these are considered to be stronger. RSI levels below 30 are considered as oversold conditions and imply that the price should reverse and move up and levels above 70 are considered as overbought conditions and imply that the price should reverse downwards.
How to use DMI with binary options trading?
DMI and ADX can be used in different ways and is most useful whenever we need to analyze if the market is trending or not, or to predict the occurrence of future trends. DMI can be used as additional indicator with the Algobit Signals Strategy, as explained in the video, or with 5 Minute Trading Strategy as a help to avoid trending markets, for example.