The directional movement index (or DMI) was created by J. Welles Wilder for determining the overall direction of a asset’s given prices. DMI consists of two lines. One line represents positive direction (+DI) and other line represents a negative direction (-DI).
Investor has to measure the difference among the present high and the past high (HiDiff) to calculate the directional movement index. Then HiDiff and LowDiff are compared with each other. If the value of HiDiff is more than a variable and +DMI is set to HiDiff and a variable -DMI is set to 0. If LowDiff is greater, -DMI is set to LowDiff and +DMI is set to 0. If ttwo values are equal, or if no trend is seen in either highs or lows, both values are set to 0. A calculation known as the Welles Summation is then performed on both +DMI and -DMI, resulting in two numbers: +DI and -DI, both ranging from 0 to 100. The directional movement index consists of these two points.
The DMI can be used in strongly trending markets to determine strong buy and sell signals. The DMI generates a strong buy signal when +DI crosses above -DI at any point and generates a strong sell signal when +DI crosses below -DI at any point. In non-trending markets, this indicator becomes less useful.The directional movement index is the basic value from which the average directional index (or ADX) is derived.
Links: http://www.iqchart.com/education/technical_dmi.asp