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Trading with the Directional Movement System (DMS)

Utility: Evaluating the Trend

Standard Settings: 14 Periods

The Directional Movement System was developed by Welles Wilder. The indicator was presented on the book “New Concepts in Technical Trading Systems”. What distinguishes Directional Movement System from other systems is that it first evaluates if a market is trending before offering trading signals. The default settings for the indicator involves 14 periods.

 

The Directional Movement System consists three lines:

(a) The Positive Direction Indicator (+DI) which summarizes the upward trend movement

(b) The Negative Direction Indicator (-DI) which summarizes the downward trend movement

(c) The Average Directional Movement Index (ADX) which indicates whether the market is trending or ranging.

Trading with the Directional Movement System (DMS)

 

Calculating the Directional Movement System:

First we must calculate the today’s Directional movement

■ +DM = Today's High - Yesterday's High (when the market moves upward)
■ -DM = Yesterday's Low - Today's Low (when the market moves downward)

After we calculate the True Range for the day.

■ Today's High - Today's Low
■ Today's High - Yesterday's Close
■ Yesterday's Close - Today's Low

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%R Larry Williams

Utility: Identifying Overbought / Oversold Market Levels

Standard Settings: 14 Periods

Williams %R is momentum oscillator as RSI. Williams % R is widely used for its ability to identify overbought and oversold market levels.

 

Important Notes Regarding the use of the Oscillator

□ Williams % R indications from 0 to -20 are alerting overbought market levels in ranging markets. In trading markets these levels may indicate a short correction before the trend continuous.

□ Williams % R indications from -80 to -100 are alerting oversold market levels in ranging markets. In trading markets these levels may indicate a short correction before the trend continuous.

□ Momentum failures occur when the price of an overbought / oversold asset fails to come back into the previous overbought / oversold territory may signify strong price movements in the opposite direction (reversals).

%R Larry Williams

 

Calculating Williams % R

■ Williams % R = HC / HL * - 100

Where,

HC = Highest High (in R Periods) – Last Closing Price
HL = Highest High (in R Periods) – Lowest Low (in R Periods)

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Trading with the Momentum Oscillator

Utility: Identifying the Trend

Standard Settings: 21, 63, 125, 250 Periods

The Momentum oscillator operates in a way similar to the Rate of Change (ROC) indicator.

 

The Momentum oscillator measures the difference between last price and the price of T periods ago. The result is a series that oscillates around a horizontal equilibrium line (zero line), this line represents the level at which the price is unchanged from its reading T periods ago. Momentum is very closely related to the, it will generate identical trading signals as the ROC.

Momentum Oscillator

 

Calculating the Momentum Oscillator

This is Momentum Oscillator Formula:

Momentum = Closing Price – Closing Price (T periods ago)

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Rate of Change (ROC)

Utility: Identifying the Trend

Standard Settings: 21, 63, 125, 250 Periods

The rate of change consist the simplest form of a technical analysis oscillator and can be also usually found as momentum.

It can simply measure the percentage change between the current price of an asset and its price before a certain period. For example the (%) change between the current price and the price before 250 days or before 21 days.

 

The Trading Year Breakout

There are 250 trading days in a single year or 125 trading days per half year. There are trading 63 days per quarter and 21 trading days per month. In general, a trend reversal commence when the shortest timeframe spreads gradually to the other timeframes.

 

How ROC defines the Long-Term Trend –Conditions of Bulls and Bears

□ When ROC of 21 periods and ROC of 63 periods is above the 125 periods ROC and the 250 periods ROC then the long-term trend is considered bullish.

□ When ROC of 21 periods and ROC of 63 periods is below the 125 periods ROC and the 250 periods ROC then the long-term trend is considered bearish.

 

Calculating ROC

■ ROC = [(Close – Close n periods ago)/ (Close n periods ago)] * 100