Trend following tools are primarily used to determine when new trends begin and the dynamic strength of the price pattern. The Directional Movement Index or DMI is one such indicator that has the ability to generate timely signals.

Basic Usage of the Directional Movement Index (DMI)

J. Welles Wilder is the technical analyst who created this price derivative formula for trends. The most basic method to trade using the DMI indicators is with crossovers.

1. +DI crossing above the –DI indicator is bullish
2. -DI indicator crossing above the +DI indicator is bearish.

In Stockcharts the colors are green and red of the respective DMI indicators. When green crosses above red, a bullish buy signal is given. When red rises above green a bear signal to sell or short sell is presented. Many traders will enter a stock long or short based on these indicators.

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