Negative Directional Indicator (-DI)

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Negative Directional Indicator (-DI)

What it is

The Negative Directional Indicator (-DI) is a component of the Average Directional Index (ADX) system. It quantifies recent downward price movement. When -DI rises and sits above the Positive Directional Indicator (+DI), downward momentum is stronger than upward momentum.

Key points

  • -DI is used together with +DI and ADX to identify trend direction and trend strength.
  • A -DI above +DI suggests a prevailing downtrend; +DI above -DI suggests an uptrend.
  • Crossovers between -DI and +DI are often used as trade signals: -DI crossing above +DI can signal a sell/short opportunity; the reverse can signal a buy.
  • ADX (the third line in the system) measures trend strength—readings above ~20–25 typically indicate a meaningful trend.

How -DI is calculated (overview)

  1. Compute directional movements (for each period):
  2. Raw -DM = prior low − current low, if that value is positive and greater than raw +DM; otherwise set -DM = 0.
  3. Raw +DM = current high − prior high, if that value is positive and greater than raw -DM; otherwise set +DM = 0.
  4. Compute True Range (TR) for each period as the greatest of:
  5. current high − current low
  6. |current high − prior close|
  7. |current low − prior close|
  8. Smooth the series (Wilder’s smoothing, commonly with a 14-period lookback):
  9. First smoothed value = sum of the first 14 raw values.
  10. Subsequent smoothed value = prior smoothed − (prior smoothed / 14) + current raw value
    Apply this smoothing separately to the -DM series and to TR (the smoothed TR is the ATR).
  11. Compute -DI:
  12. -DI = (Smoothed -DM / Smoothed TR) × 100

Notes on smoothing: Wilder’s smoothing is an exponential-like moving average that preserves prior sums while adding the current period. Use the same period (commonly 14) for both -DM and TR.

Interpretation and usage

  • Direction: If -DI > +DI, downward movement is stronger; if +DI > -DI, upward movement is stronger.
  • Crossovers: Traders often use -DI/+DI crossovers as entry/exit signals (e.g., sell when -DI crosses above +DI).
  • Combine with ADX: Use ADX to filter signals—only act on DI crossovers when ADX indicates a sufficiently strong trend (commonly ADX > 20–25).
  • Example strategy: Take long trades only when ADX > 20 and +DI > -DI; take short trades when ADX > 20 and -DI > +DI.

Differences from moving averages

  • A moving average is an average of price levels over a period. -DI is based on directional movement (changes in lows) and the relationship to volatility (TR), not a direct price average.
  • Consequently, -DI and moving averages provide different insights: -DI focuses on directional pressure, while moving averages smooth price levels.

Limitations and cautions

  • -DI alone is limited; it indicates relative downward pressure but not trend strength (use ADX for strength).
  • Frequent intersections between +DI and -DI can produce whipsaws—false signals that lead to losses.
  • Best practice: confirm DI signals with other technical tools (volume, support/resistance, price patterns) and consider higher-timeframe context.

Quick checklist to calculate -DI

  1. Calculate raw -DM and raw +DM for each period (set to zero if conditions not met).
  2. Calculate TR for each period.
  3. Smooth raw -DM and TR using Wilder’s smoothing (commonly 14 periods).
  4. Compute -DI = (Smoothed -DM / Smoothed TR) × 100.
  5. Compare -DI to +DI and consult ADX for trend strength before trading.

Summary

-DI is a directional momentum tool that, when paired with +DI and ADX, helps determine whether downward or upward movement is dominant and whether a trend is strong enough to trade. Use smoothed -DM and ATR values (typically 14 periods) to compute -DI, and always confirm signals to reduce whipsaws.