Key Takeaways
- -DI measures strength of downward price movements.
- -DI crossing above +DI signals potential downtrend.
- -DI paired with ADX confirms trend strength.
- Rising -DI indicates increasing bearish market pressure.
What is Negative Directional Indicator (-DI)?
The Negative Directional Indicator (-DI) is a technical analysis tool used to measure the strength of downward price movements within a market. It forms part of the Directional Movement Index (DMI) system, which helps traders identify bearish trends by comparing current lows to previous lows and smoothing these differences relative to the Average True Range (ATR).
This indicator is essential for understanding market direction and is often analyzed alongside other tools like the candlestick patterns to confirm price action signals.
Key Characteristics
Understand the core traits of -DI to apply it effectively in your trading or investment analysis:
- Directional Focus: -DI quantifies downward price pressure, rising when sellers dominate the market.
- Range Normalization: It uses the range of price movement by dividing directional movement by the ATR to adjust for volatility.
- Smoothing Method: Values are smoothed using data smoothing techniques, typically Wilder's exponential moving average, to reduce noise.
- Comparative Indicator: Always interpreted in relation to the Positive Directional Indicator (+DI) to identify trend direction shifts.
- Scale and Signal: Fluctuates between 0 and 100, with crossovers above +DI signaling potential downtrends.
How It Works
The -DI calculation starts by measuring the difference between today's low and the prior day's low. When today's low is lower, that difference becomes the Negative Directional Movement (-DM); otherwise, it is zero. This value is then divided by the ATR to normalize for market volatility.
Afterwards, the result is smoothed over a set period (commonly 14 days) using data smoothing methods, producing a line that reflects the intensity of bearish momentum. Traders watch for the -DI line crossing above the +DI line to confirm stronger downward trends, especially when combined with other indicators like the MACD.
Examples and Use Cases
Applying -DI in real-world scenarios helps you spot and manage bearish trends effectively.
- Energy Sector: When analyzing companies like ExxonMobil and Chevron, rising -DI values paired with price declines can signal intensifying selling pressure.
- Trend Confirmation: Traders use -DI crossovers with +DI and ADX readings to decide when to enter short positions or exit longs during downtrends.
- Risk Management: Using -DI alongside trailing stops helps lock in profits when the indicator remains elevated, signaling ongoing bearish momentum.
- Growth Investing: Even in growth stocks, monitoring -DI can provide alerts of potential correction phases, supplementing insights from guides like best growth stocks.
Important Considerations
While -DI is a valuable tool for identifying downward momentum, it should not be used in isolation. Its signals are more reliable when combined with trend strength indicators and volume analysis to avoid false signals in ranging or volatile markets.
Be aware that the smoothing process introduces lag, so -DI may react slowly to rapid market changes. Integrating it with other indicators like the Parabolic Indicator can improve timing and decision-making in your analysis.
Final Words
The Negative Directional Indicator (-DI) highlights when sellers gain control and downtrends intensify, especially when it crosses above +DI in a strong trending market. Monitor -DI alongside ADX to confirm trend strength and consider adjusting your positions accordingly. Keep an eye on these signals to time entries and exits more effectively.
Frequently Asked Questions
The Negative Directional Indicator (-DI) is a technical analysis tool that measures the strength of downward price movements by comparing current lows to previous lows, adjusted for market volatility. It is part of the Directional Movement Index (DMI) system developed by J. Welles Wilder.
-DI is calculated by first finding the negative directional movement (-DM), which is the difference when today's low is lower than yesterday's low. This value is then divided by the Average True Range (ATR) to normalize volatility and smoothed using Wilder's exponential moving average, typically over 14 periods.
When -DI is above +DI, it signals that sellers are dominating the market, indicating a bearish trend. Traders often use this as a cue to consider short positions or to exit long trades.
-DI signals are more reliable when paired with the ADX, which measures trend strength. A high ADX value (above 25) combined with -DI crossing above +DI suggests a strong downtrend, while a low ADX indicates a weak or sideways market where signals may be less dependable.
Traders often use rising -DI values and crossovers above +DI to enter short positions or set trailing stops during downtrends. Holding short positions is common while -DI remains above +DI and ADX is high, exiting when these conditions reverse.
-DI uses highs and lows to provide a clearer view of price direction by focusing on actual price extremes each period. This approach helps better capture directional movement compared to using closing prices alone.
-DI is most effective in trending markets such as futures and forex, where directional price movement is clearer. In sideways or low-volatility markets, its signals may be weaker and less reliable.
