Directional Movement Indicators using n Range by Ben Margolis Introduction to the Theory Directional Movement Indicators (DI+ and DI-) have long been established as an effective means of determining whether the price change of a given security is trending in one direction or another. These indicators are created by summing up the intraday movement of a stock across a period of several days.   A typical DI Movement chart with a 14 day period. Note that the “Sell” signals,(A and C) and the “Buy” signals (B and D) were all late, and an investor following these signals would have lost money three out of four times.   The length of that period, mathematically referred to as “n days,” is critical. Shorter periods produce more erratic results, generating more trading signals and as a result more false signals. Longer periods produce smoother results, generating fewer (and truer) signals, but also as a result of the longer period, generating those signals later, often well after the trend has ended. Mathematicians argue about the correct value of n, with most agreeing it is 9, 14 days or somewhere thereabouts. This researcher had been working on the theory that the correct value of n may differ from security to security, from strategy to strategy and even perhaps, from day to day and was attempting to devise a computer program that would seek out a given stock’s “best value of n.” That goal proved illusive, however, during experimentation it was noted that while differing values of n could produce wildly different signals from the same stock on the same day, there were also days in which all values of n produced the same signal for that stock. And those signals appeared to be the truest ones of all.

A new theory was formed: There is no correct value of n, because n should not be any single value at all, but rather it should be a range of values. True signals occur when all values of n produce the same signals at the same time. A new chart was plotted that demonstrates this theory.    A "N-Range " DI Movement chart. Note that the Open Long signals (E and G) the Close Long signals(F and H) and the Open and Close Short signals (J and K), were all much more timely and much  more profitable.   We overlaid 15 different DI Movement charts with varying values of n, combining thirty different indicators in to one. Our Experiments were based on the nRange of 5 to 20 days. The rest of this document will focus on that chart and this researcher’s attempt to interpret it. In its most basic form, the chart illustrates three overall conditions of a given security.   Trending Positive  All DI+ (green lines) are well above DI- (red) with a large open white space between. This is the result of sustained up trend.

Trending Negative   All DI- (red lines) are well above DI+ (green) with a large open white space between. This is the result of sustained downward trend.

Entanglement DI- (red lines) crisscross with DI+ (green) with no (or very little) open white space between. Different values of n are providing conflicting buy and sell signals.   This is the result of mostly sideways price movement, with no clear trend.

Having identified our three basic states, the goal of the system we are to create is obvious; To open a position at the beginning of a trend, to close that position as close to the end of that trend as possible, and to not trade at all during periods of entanglement. The obvious set of opening signals for that system is as follows.

OPEN LONG SIGNAL Description: All DI+ lines have just crossed above DI-. A white gap has formed. DI+n5 (Bright green) is well above DI+n20 (dark green). DI-n5 (Bright red) is well below DI-n20 (dark red). Cause: Several recent up days with closing prices at or near intraday highs. Several consecutively higher intraday lows.  Signal: Substantial recent increase in positive pressure, with a substantial recent decrease in negative pressure. Could be the beginning of an up trend. Open a long position.

OPEN SHORT SIGNAL  Description: All DI- lines have just crossed above DI+. A white gap has formed. DI-n5 (Bright red) is well above DI-n20 (dark red). DI+n5 (Bright green) is well below DI+n20 (dark green). Cause: Several recent down days with closing prices at or near intraday lows. Several consecutively lower intraday highs. Signal: Substantial recent decrease in positive pressure, with a substantial recent increase in negative pressure. Could be the beginning of a down trend. Open a short position.

The open signals were obvious enough. It was the attempt to generate closing signals that proved problematic. If one simply waits for an "Open Short" signal to close a long position, then your trend is already well reversed and chances are that your profit is gone. However, if one tries to predict the end of the trend, by closing the position as soon as one sees Entanglement, then, about half the time, the trend continued anyway and you still lose money.  We ended up with over a dozen different ways to generate closing signals, all of which had these same problems to one extent or another. It was at that point that we decided to employ a pattern recognition system (i.e. a neural network) to take a better look at Directional Movement. That work is summarized in my next white paper: An Analysis of Directional Movement as a Complex System.