Evaluation of DMI Trading System

Its easy to attribute meaning to seemingly complex trading systems where often there is none. What follows is an exchange I had with a trader regarding a DMI (Directional Movement Indicator) system he was touting. This system simplification known as inequality algebra. It was discussed in an issue of TASC.

XXXXtrader wrote:

DMI is still the best all around indicator for all time frames including intraday.

Oh really! Lets look at DMI shall we.

DMI is based on positive and negative movement (assume 14 day): +DI14 and -DI14

Algebraically what you are saying is If +DI14 > -DI14 then buy

+DI14 is defined in terms of two functions,

+DI14 = +DM14/TR14

TR14 is the 14-day sum of the true price range

+DM14 is the 14-day sum of the high price for the current
      day, H, minus the high price for the preceding day, H+1:

+DM14 = (H1-H2)+(H2-H3)+....+(H14-H15) = H1-H15

-DI14, is:

-DI14 =-DM14/TR14

and -DM14 is the 14-day sum of the low price, L,
     minus the low price for the preceding day, L+1

again simplifying gives:

-DM14 = L1 - L15

If we plug these +/-DM equations into the original
inequality, we get:

(H1-H15)/TR14 > (L1-L15)/TR14

which simplifies to:

H1-H15 > L1-L15

Which can be further simplified by adding (H15-L1)
to both sides giving:

If H1-L1 > H15-L15 then buy

I'm very skeptical of a system that says go long if today's price range is greater than the price range 15 days ago. Why should that matter? Where is the logic?


I try not to let LOGIC cloud my judgement...LOL This is the market...not a math exam.

I gave an answer based on what 1 indicator works best for me and I mainly Index trade. I never really tried to understand why...just like I never really tried to understand why it does SOOOOO much better on the weekly S&P and Naz and not the Dow.

I trade the mini's almost exclusively and nearly everyone of my systems is based mainly on DMI / ADX and moving averages and they work really well. That is all I based my reply on.

We can do better than these guys.