Here’s a clear, practical guide to the Negative Directional Indicator (-DI)—what it is, how it’s calculated, what it tells you, how it differs from a moving average, its limitations, and step‑by‑step trading guidance.
Source: Investopedia. “Negative Directional Indicator (-DI).” https://www.investopedia.com/terms/n/negativedirectionalindicator.asp. (Concept originally developed by J. Welles Wilder Jr., New Concepts in Technical Trading Systems.)
Key takeaways
– The Negative Directional Indicator (-DI) is part of the Directional Movement System (DMS) and the Average Directional Index (ADX) family. It measures the strength of downward price movement.
– -DI is plotted together with the Positive Directional Indicator (+DI). When -DI > +DI, downward movement has been stronger recently; when +DI > -DI, upward movement has been stronger.
– -DI is derived from smoothed negative directional movement (-DM) divided by the Average True Range (ATR). Many implementations multiply the result by 100.
– Use -DI together with +DI and ADX (trend strength) to reduce false signals. ADX values above ~20–25 suggest a trend is strong enough to trade.
What is the Negative Directional Indicator (-DI)?
– -DI quantifies how strong downward price moves have been relative to total price volatility. It is one component of the DMS (the other component is +DI). The ADX line is a smoothed measure of the difference between +DI and -DI and indicates trend strength.
The formula (conceptual)
– Compute DownMove = Prior Low − Current Low (only positive values count—see the step below).
– Smooth the series of negative directional movement (S−DM) using Wilder’s smoothing (typically a 14‑period smoothing).
– Compute ATR (Average True Range) with the same smoothing period.
– -DI = (S−DM / ATR) × 100 (some sources omit the ×100 and plot the raw ratio).
How to calculate -DI — step‑by‑step
Use Wilder’s original approach (typical period n = 14):
1. For each period compute UpMove and DownMove:
– UpMove = Current High − Prior High
– DownMove = Prior Low − Current Low
2. Determine directional movement values (+DM and −DM) for that period:
– If UpMove > DownMove and UpMove > 0 → +DM = UpMove, otherwise +DM = 0
– If DownMove > UpMove and DownMove > 0 → −DM = DownMove, otherwise −DM = 0
(This avoids counting both directions in the same period.)
3. Compute True Range (TR) for each period:
– TR = max( Current High − Current Low, |Current High − Prior Close|, |Current Low − Prior Close| )
4. Smooth −DM and TR using Wilder’s smoothing (n typically 14):
– First-period S−DM = sum of the first n −DM values
– Subsequent S−DM_t = S−DM_{t−1} − (S−DM_{t−1} / n) + Current −DM_t
– Same smoothing formula used for ATR: ATR first period = sum(TR first n periods) and then ATR_t = ATR_{t−1} − (ATR_{t−1} / n) + TR_t
5. Compute −DI:
– −DI_t = (S−DM_t / ATR_t) × 100
6. Plot −DI with +DI and compute ADX (a smoothed average of |(+DI−−DI)| / (+DI+−DI)) to gauge trend strength.
Worked illustration (small smoothing example)
To illustrate Wilder smoothing (use n=3 for simplicity, though real use typically n=14):
Assume period −DM values: Periods 1–3: 0.5, 0.7, 0.2
– First S−DM (period 3) = 0.5 + 0.7 + 0.2 = 1.4 (initial sum for n=3)
– Next period current −DM = 0.6
– S−DM_next = S−DM_prev − (S−DM_prev / n) + current −DM
= 1.4 − (1.4 / 3) + 0.6 = 1.4 − 0.4667 + 0.6 = 1.5333
Do the same smoothing for ATR, then compute −DI = (S−DM / ATR) × 100.
What the −DI tells you (interpretation)
– Direction: If −DI is above +DI, downward movement has outpaced upward movement recently → bearish bias. If +DI is above −DI → bullish bias.
– Momentum of decline: A rising −DI line suggests the downtrend is strengthening; a falling −DI suggests weakening downward pressure.
– Crossovers: When −DI crosses above +DI it’s often interpreted as a sell/short signal; when +DI crosses above −DI it’s a buy/long signal. Because these can produce false signals, traders usually confirm with ADX and other tools.
How −DI differs from a moving average
– A moving average is an average of price (often closing prices) over a fixed period. It smooths price history.
– −DI focuses only on the negative directional moves between consecutive lows (and requires comparing down vs up move to avoid double counting). It’s not a simple average of price, and it’s normalized by volatility (ATR). Thus, −DI tracks directional pressure, not price level averages.
Limitations and common pitfalls
– Lagging indicator: Uses historical moves and Wilder smoothing, so it will lag price changes.
– Whipsaws: +DI and −DI can cross frequently in choppy markets, producing false signals.
– Parameter sensitivity: Default n = 14 is common, but shorter periods generate more signals and more noise; longer periods are smoother but slower.
– Needs confirmation: −DI alone is limited. Use with +DI, ADX (trend strength), price action, volume, and/or other indicators.
– Not a stand‑alone entry system—combine with risk management and confirmation rules.
Practical trading steps and rules (examples)
1. Set up:
– Plot +DI, −DI, and ADX (common settings: 14 periods).
– Use the same timeframe for all three lines and match to your trading horizon (e.g., daily for swing trades).
2. Filter by trend strength:
– Only trade DI crossovers when ADX is above a threshold (common thresholds: ADX > 20 or ADX > 25). ADX rising implies a strengthening trend.
3. Entry rules (example long):
– +DI crosses above −DI and ADX > 20 and ADX is rising → consider a long entry.
– Confirm with price structure (higher highs/lows), volume increase, or another confirmation signal.
Entry rules (example short):
– −DI crosses above +DI and ADX > 20 and ADX rising → consider a short entry.
– Confirm with breakdown of support, volume, or bearish price pattern.
4. Exit and risk management:
– Place a stop loss based on ATR (e.g., 1.5–2× ATR below entry for longs) or structure (recent swing low/high).
– Consider exiting when the DI crossover reverses (e.g., +DI crosses back below −DI) or when ADX turns down below your threshold.
– Use position sizing that limits risk per trade.
5. Avoiding whipsaws:
– Require crossovers to sustain for a few bars (e.g., DI difference > 2 points for at least 2 bars), or combine with moving averages or support/resistance to avoid frequent false entries.
Further reading and tools
– Investopedia: Negative Directional Indicator (-DI) (link above).
– J. Welles Wilder Jr., New Concepts in Technical Trading Systems (original methodology for DMI/ADX).
– Most charting platforms include DI and ADX indicators; try demo/backtesting before using live.
Summary
– −DI is a volatility‑normalized measure of downward directional movement. On its own it’s limited, but plotted with +DI and ADX it becomes a practical part of a trend‑following toolkit. Use ADX to filter signals, apply sound risk management, and confirm signals with price action to reduce whipsaws.
If you’d like, I can:
– Walk through a full numeric example using actual price data,
– Show how to compute −DI, +DI, and ADX in Excel,
– Suggest strategy parameters and backtest results for a particular market/timeframe. Which would you prefer?