The dynamic momentum index (DMI) was developed by Tusher Chande, founder of the Chande Momentum Oscillator, and Stanley Kroll, a professional commodities trader, in 1993.
The (DMI) is very similar to the relative strength index (RSI) but they have one main difference. Whereas the RSI uses a fixed number of time periods, usually 14, the DMI uses flexible time periods depending on how volatile the changes are. Those different time periods can be anywhere from 5 to 30. This makes the DMI more responsive to changing prices than the RSI.
The purpose of the indicator is to determine whether an asset is overbought, trading at a price above its fair value price, or oversold, trading below its fair value price.
The indicator oscillates between 0 and 100 but the important lines to look at are 30 and 70. When the price rises above 70, the asset is trading at a price over its fair value. When the asset price drops below 30, the asset is oversold.
Trend Direction
Using the DMI, If the signal has been below 30 for a while but rises and crosses above 30, this can signify a reversal of the trend and a signal to buy. (Try out indicators on Tradingview.com)
Conversely, If the signal has been over 70 but starts to cross and then dips below 70, this can signify a reversal to a downward trend and signal to sell.
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Using the DMI, the varying time periods are useful for prices that move very quickly toward important support or resistance lines. Exit and entry points can be found earlier than with the RSI because the DMI is less lagging, meaning the price updates are known sooner rather than later but still not in real-time.
Retracement
Retracement is when an upward or downward trend goes into a temporary reversal but bounces back into the prior trend.
Using the DMI, If the signal was above 30, dips below 30, and then rises above 30, this can signify a retracement to continue the upward trend and a signal to buy.
Conversely, If the signal was below 70, rises over 70 but turns and dips below 70, this can signify a retracement to continue a downward trend and a signal to sell.
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