Using Directional Index Equilibrium Points to Assess Trend Reversals
Summary
The document describes an equilibrium level derived from the Directional Movement Indicator. It attributes the concept to Welles Wilder and presents crossings between positive and negative directional indicators as important points for judging a commodity trend. The accompanying calculation uses delayed high and low movements, Wilder averages over 14 periods, and projected indicator values to estimate the price level where the directional relationship could change.
The resulting line is plotted against price to show how far price is from that level, giving traders a way to gauge the move needed to reach a potential trend reversal threshold. The document offers code but no chart-based examples, performance results, or rules for entering or exiting trades. Its usefulness is therefore as an indicator construction and interpretation note; it does not establish that a crossing predicts a reversal or that the approach works across markets or timeframes.
Key ideas
- The method treats crossings between positive and negative Directional Movement indicators as equilibrium points.
- It computes delayed directional movements from changes in recent highs and lows.
- Wilder averages are used to derive the positive and negative directional measures.
- A projected price level is plotted to show the distance to a possible indicator-defined trend reversal.
- The document provides no empirical evidence that the level predicts profitable trades.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.