Directional Movement System Part 1

The objective of the Directional Movement System designed by Welles Wilder is to determine whether a market is likely to experience a trending or trading range environment.

The distinction is important because a trending market will be better signaled by the adoption of trend-following indicators such as moving averages (MAs), whereas a trading range environment is more suitable for oscillators.

The calculation of the Directional Movement System is quite involved. To simplify matters, the directional movement indicator is plotted by calculating the maximum range that the price has moved, either during the period under consideration (a day, week, la-minute bar, and so on) or from the previous period's close to the extreme point reached during the period.

In effect, the system tries to measure directional movement. Since there are two directions in which prices can move, there are two directional movement indicators, called + DI and - DI. Since the raw data derived from the calculation are unduly volatile, they are each calculated as an average over a specific time period and the result is plotted on a chart.