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
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
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.
" 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
In its most basic form, the chart illustrates three overall conditions of a
All DI+ (green lines) are
well above DI- (red) with a large open white space between. This is the result
of sustained up trend.
All DI- (red lines) are well
above DI+ (green) with a large open white space between. This is the result of
sustained downward trend.
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
The obvious set of opening signals for
that system is as follows.
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).
Several recent up days with closing prices at or near intraday highs.
Several consecutively higher intraday lows.
Substantial recent increase in positive pressure, with a substantial recent
decrease in negative pressure. Could be the beginning of an up trend. Open a
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).
Several recent down days with closing prices at or near intraday lows.
Several consecutively lower intraday highs.
Substantial recent decrease in positive pressure, with a substantial recent
increase in negative pressure. Could be the beginning of a down trend. Open a
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.