Stealing Pips with DMI Forex Trading Strategy
We’re very thrilled to introduce you to our new proprietary DMI Forex Trading strategy that will help you steal pips from the Forex market on a daily basis. The Directional movement index strategy will show you how to identify where smart money are putting their dollars to work and what it means for you and your strategy.
Our team at Trading Strategy Guides will show you how you can apply the DMI indicator in your own trading activities so you can make better trades and more pips.
The best indicator for trend trading and for gauging the strength of the trend is the DMI Forex indicator because it has the capabilities to distinguish between a strong trend and a weaker trend. This will allow you to only trade those markets that exhibit strong trends which have the potential to give you much bigger profits.
The directional movement indicator can be used to develop a simple trend trading strategy that works on all time frames and can be used to trade any financial instrument (stocks, commodities, cryptocurrencies, and currencies)
Before we go into the real heavy stuff, let’s see what the Directional Movement Index (DMI) is and how to use DMI indicator. You can also trade with the fractal trading strategy.
What is Directional Movement Index (DMI)?
The Directional Movement Index indicator, or DMI, is a trend trading indicator developed by Welles Wilder, which also invented one of the most popular overbought and oversold indicator – the RSI indicator.
DMI is based on a scale from 0 to 100 that identifies the price direction and the strength of the trend. You can successfully use the directional movement index indicator to accurately forecast future trends in the Forex market.
The DMI indicator is composed of three lines:
- ADX, which is non-directional, so it will quantify the strength of the trend regardless if it’s bullish or bearish. The ADX line is derived from the relationship of the DMI+ and DMI- lines
- DMI+, which measures the strength of the upward price movement.
- DMI-, which measures the strength of the downward price movement.
The DMI+ moves in tandem with the price. When the price rises, the DMI+ rises and when the price falls the DMI+ falls. Conversely, the DMI- moves counter-directional to price.
The second trading rule when using the DMI indicator is that when the DMI+ line is rising and it’s above the DMI- line the trend is up. When the DMI- line is rising and it’s above the DMI+ line, the trend is down.
While we use the DMI+ and DMI- lines to gauge the direction of the trend, we use the ADX line to measure the strength of the trend. According to the textbook rules an ADX reading above 25 signals the presence of a strong trend.
Note* By using an ADX reading above 20 level, we can get much accurate entry signals.
Now, here is how to use DMI indicator to catch the trend on your preferred time frame:
Directional Movement Index Strategy
All the information you need to be successful at trading is already available to you. You just have to train your brain to see it. The Directional movement index strategy will make it easier for you to see only those things that really matter when you read the price chart.
If you want to identify high-probability trades follow this step-by-step trend-following guide. You can freely use what you’ve learned to simply develop your own trend trading strategy.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of this entry method.
For this article, we’re going to look at the buy side.
Step #1: Use the Daily Chart to determine the dominant trend. DMI+ line needs to be above the DMI- line and ADX line needs to cross above the 20 level.
Preparation is always essential to your success, especially in trading. The first step you want to take before you do anything else is to get your charts ready so when the trade signals show up on your chart, you’ll be able to identify the trade fast.
Make sure you draw a horizontal line in the DMI indicator window at the 20 level.
Since we’re looking for buying opportunities we need to dominant trend to be on the upside. For this purpose, we’re going to use a multiple time frame analysis in order to counteract the DMI tendencies to produce many false signals.
The attached EUR/USD chart shows you the right way to judge the trend through the eyes of the DMI indicator.
Now, that we’ve determined the dominant trend, it’s time to switch to our favorite time frame and only trade with the trend.
Step #2: Switch to the 1h time frame and wait until the DMI+ line breaks above the DMI- line
Since we have a predominant bullish trend we want to determine only those situations where the lower time frame aligns with the higher time frame trend. This is one simple way your multi-time frame analysis can improve your trading.
We need to see again the DMI+ line rising above the DMI- line to signal a bullish trend.
One of the main concepts behind multiple time frame analysis is using bigger time frames to determine the predominant trend and then executing trades on smaller time frames, but only in the direction of the main trend.
Let’s now outline the trigger signal for our entry strategy.
Step #3: Enter a long position when the ADX line breaks above the 20 level.
When the ADX line breaks above the 20 level, we know for sure the trend is strong enough it will continue to move up after we opened our position.
We now have an alignment of the trend in two time frames and the strength of the trend is enough to boost the bullish momentum, which increases your chances of having a profitable trade.
When you only take those trading opportunities that have higher odds of success you preserve your account balance. Preserving your capital should always be your number one priority if you want to have long-term success in this business.
This brings us to the next important thing that we need to establish for our DMI trading strategy, which is where to place our protective stop loss.
Step #4: Hide your protective Stop Loss below the last swing point
Giving enough room for your trades to work is essential if you don’t want to end up being stopped out prematurely. The most effective way to protect your trade is to place your stop loss below the most recent swing low.
If the trend is strong enough, the market shouldn’t break below the previous swing low. A breakout below will simply invalidate the trade so we want to be out of that position.
Last but not least, we also need to define where we take profits.
Step #5: Take profit when the ADX touches the 40 level.
An ADX reading of 40 indicates that the trend is overextended and we should now expect the trend to lose its bullish momentum. The ADX is a good filter to measure not just when the trend is the strongest, but also when the trend is running out of gas.
The ADX indicator is a powerful tool on its own. It can help us determine when the buyers or the sellers are exhausted and the trend is about to reverse.
Note** the above was an example of a BUY trade using our DMI strategy. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion – DMI Forex Trading Strategy
The first major objective you have as a trader, no matter of your trading style, is to find the market direction. In order to make a profit trading the markets you need to market to continue moving in the direction of your trade after you opened a position.
The DMI forex trading strategy can assist you in finding the trend direction as well as the strength of that trend. If you’re afraid to trade trading in the direction of the dominant trend can be so much easier and it might be the right solution for your own personality.
Thank you for reading!
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