The
simplest trading method based on the system of directional movement implies
comparison of two direction indicators: the 14-period +DI one and the 14-period
-DI. To do this, one either puts the charts of indicators one on top of the
other, or +DI is subtracted from -DI. W. Wilder recommends buying
when +DI is higher than -DI, and selling when +DI sinks lower than -DI.
To
these simple commercial rules Wells Wilder added "a rule of points of
extremum". It is used to eliminate false signals and decrease the number
of deals. According to the principle of points of extremum, the "point of
extremum" is the point when +DI and -DI cross each other. If +DI raises
higher than -DI, this point will be the maximum price of the day when they
cross. If +DI is lower than -DI, this point will be the minimum price of the
day they cross.
The point of extremum is used then as
the market entry level. Thus, after the signal to buy (+DI is higher than -DI)
one must wait till the price has exceeded the point of extremum, and only then
buy. However, if the price fails to exceed the level of the point of extremum,
one should retain the short position.
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