Directional Movement

Directional Movement DM

Read on formula, calculation steps and VBA Code. For naive backtest results and findings, visit here

Introduction

The directional movement index is based on the directional movement indicator which is in turn calculated from the directional movement of the period. Directional movement classifies market movements into positve and negative directional movements, represented by +DM and -DM respectively. Users must understand that both +DM and -DM some what like indices that seperately measure the day's upward movement or downward movement. As such, both +DM and -DM are positive numbers. In its current form, the DM serves mainly as an input to the calculation of the directional movement indicator.

+DM = (High_t– High_t-1) OR 0 if either of the following occurs

1. (High_t-High_t-1) < (Low_t-1-Low_t) - Low fell more than high
2. Both (High_t-High_t-1) and (Low_t-1-Low_t) are less than 0. - High fell and low rose

-DM = (Low_t-1-Low_t) OR 0 if either of the following occurs

1. (High_t-High_t-1) > (Low_t-1-Low_t) - High rose more than low
2. Both (High_t-High_t-1) and (Low_t-1-Low_t) are less than 0. - High fell and low rose

In both Scenario 1 and 2 below, the improvement in high is better than the change in low. Therefore, positive DM, +DM is equal to (High_t – High_t-1), while negative DM, -DM is 0.

In Scenario 3 below, Today’s High is lower than Yesterday’s High and Today’s Low is higher than Yesterday’s Low. Both +DM and –DM are 0.

Most articles do not mention what to do when (High_t – High_t-1) and (Low_t-1 – Low_t) are both positive and of the same value.

Both +DM and -DM are either 0 or positive numbers. They reflect if the market is more bullish and bearish.

Signals are based on divergence between moving averages of the +DM and the -DM. For example, the moving average of the +DM will slope upwards in a bullish market, while the -DM remain flat.

The +DM and -DM is usually used in the computation of the directional index, DI and the average directional movement index, ADX. The +DM and the -DM generally measures ths strength of the upward and downward movements respectively.

VBA Code

Method A uses functions, while Method B uses sub procedures to calculate DM. Method B is faster and more flexible.

Method A

Do note that the DM function is actually an array function. To use it, enter into any cell "=DM([current high], [current low], [previous high], [previous low])". Select the cell and the neigbouring cell right next to it, press F2 and Crtl+Shift+Enter. +DM and -DM will be computed.

'Paste this code into your ThisWorkBook code window in VBA. Right Click This WorkBook in Project Explorer and click View Code.
Private Sub Workbook_Open()

AddUDF

End Sub

'The rest belong to any module

Sub AddUDF()
'Tells Excel to includes these in list of functions, add descriptions to them and create a new 'category called Technical Indicators.
Application.MacroOptions macro:="DM", _
Description:="Returns Positive Directional Movement and Negative Directional Movement" & Chr(10) & Chr(10) & _
"Select current high, current low, last period's high and last period's low.", _
Category:="Technical Indicators"
End Sub

Public Function DM(high, low, highYesterday, lowYesterday)
high0 = high - highYesterday
low0 = lowYesterday - low
Dim result(0, 1 To 2)
If high0 < 0 And low0 < 0 Then
result(0, 1) = 0
result(0, 2) = 0
Else
If high0 > low0 Then
result(0, 1) = high0
result(0, 2) = 0
Else
If high0 < low0 Then
result(0, 1) = 0
result(0, 2) = low0
Else
result(0, 1) = high0
result(0, 2) = low0
End If
End If
End If
DM = result
End Function

To use the DM function, enter into any cell "=DM([current high], [current low], [previous high], [previous low])". Select the cell and the neigbouring cell right next to it, press F2 and Crtl+Shift+Enter. +DM and -DM will be computed.

Method B

Run the DM_1 sub from the Runthis sub.

Sub Runthis()
Dim high As Range, low As Range, close1 As Range
Dim volume As Range, output As Range, n As Long
Dim k As Long
'These are the location of your respective historic data and output
'Setting close and volume is not necessary for the DM_1 sub alone.
Set high = Range("C2:C19632")
Set low = Range("D2:D19632")
Set close1 = Range("E2:E19632")
Set volume = Range("F2:F19632")
Set output = Range("H2:H19632")
DM_1 high, low, output
End Sub

Sub DM_1(high As Range, low As Range, output As Range)
high0 = high(1, 1).Address(False, False)
high1 = high(2, 1).Address(False, False)
low0 = low(1, 1).Address(False, False)
low1 = low(2, 1).Address(False, False)
output(0, 1).Value = "'High-High"
output(0, 2).Value = "'Low-Low"
output(0, 3).Value = "Positive DM"
output(0, 4).Value = "Negative DM"

output(2, 1).Value = "=" & high1 & "-" & high0
output(2, 2).Value = "=" & low0 & "-" & low1

high2 = output(2, 1).Address(False, False)
low2 = output(2, 2).Address(False, False)
output(2, 3).Value = "=IF(OR(" & high2 & "<" & low2 & ",AND(" & high2 & "<0," & low2 & "<0)),0," & high2 & ")"
output(2, 4).Value = "=IF(OR(" & high2 & ">" & low2 & ",AND(" & high2 & "<0," & low2 & "<0)),0," & low2 & ")"
Range(output(2, 1), output(2, 4)).Copy output
Range(output(1, 1), output(1, 4)).ClearContents
End Sub

Other References

http://fxtrade.oanda.com/learn/graphs/indicators/adx.shtml

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