Binary options’ indicator Directional Movement Index is based on the concept developed by J. Welles Wilder junior and described in his work New Concepts in Technical Trading Systems in 1978. The author assumes that markets stay in the directional movement condition only for 30% of the entire trading time. This binary options’ indicator was invented to avoid the situation, when traders make losses in the pauses between trend’s actions.
DMI: indicator’s overview
The Directional Movement Index indicator has two main aspects of work: determination of the current market’s trend and research of this market’s movement’s strength, as these auxiliary tools are also based on the ADX indicator.
As mentioned above, the binary options’ Directional Movement Index allows finding a trend in the market. It includes two lines, which are DMI+ and DMI-. The first one is positively directed and the second one is negatively directed. Both these lines together generate signals, and these signals for the purchase of the Put and the Call options are provided to a trader.
Usage of Directional Movement Index
The signal to buy the Call option is formed, when the DMI+ line grows and crosses with the DMI- line. Otherwise, the signal for the Put option purchase appears. The line which is located higher is prevailing and shows that a trend has the certain strength. But if the market’s volatility is pretty low, crossing of these lines may send many false signals. For this reason, usage of the single binary options’ Directional Movement Index is unacceptable. In this case, it can only act as the auxiliary tool. But when market volatility is high, its signals can be fairly accurate.
As for the values of this binary options’ indicator, they are located within the range from 0 to 100. At the same time, the higher the indicator’s value is, the stronger the oscillation movements in a market are. If the lines of the Directional Movement Index are located higher than 25, then there is the strong unidirectional movement (trend) in the market.
The line with a negative value is, at the same time, a component of the ADX indicator, which can be used for the determination of the bearish trend. If this line shows a growth, the probability of the descending trend’s continuation grows. In the majority of cases, this value is opposite to the positive line. Crossing of the positive and negative lines can be the signal to buy the Put options. At the same time, the negative line is moving in the direction which is opposite to a price chart.
The line with a positive value usually moves in the same direction as a price chart. In other words, if prices grow, line with the positive value will grow too. And if prices decrease, this line will decrease too. If there is a fast growth of the line with the positive value, chances for the continuation of the ascending trend grow substantially too. Showings of the line with a positive value are always opposite to the showings of the line with a negative value.
Crossing of the lines which have positive and negative values means that a trader gets an opportunity to buy the Call options because the new ascending trend is forming in the market. In addition, the line with a positive value is the crucial one for the ADX index estimation.
One of the disadvantages of this indicator is a fact that, as mentioned above, if the market volatility is low, it can’t be used as the single indicator.