Trend Strength & Oscillators
How strong is the trend, and where is the price within its range?
Knowing that a trend exists is only half the story. The other half is knowing how strong it is — and whether the price has stretched too far from its recent range.
Moving averages and crossovers tell you about direction. But two important questions remain: how strong is the current trend? And is the price near the top or bottom of its recent range?
This lesson introduces two complementary indicators that answer these questions — the same ones used in our Analysis Pro view.
DMI — Directional Movement Index
The DMI was developed by J. Welles Wilder Jr. (the same creator of the RSI). It measures trend strength and trend direction using three components:
+DI (Positive Directional Indicator)
Measures upward movement. When +DI is above -DI, the trend direction is bullish — buyers are in control.
-DI (Negative Directional Indicator)
Measures downward movement. When -DI is above +DI, the trend direction is bearish — sellers are in control.
DX (Directional Index)
Measures trend strength regardless of direction. DX = |+DI − -DI| / (+DI + -DI) × 100. The wider the gap between +DI and -DI, the stronger the trend.
Reading DX — trend strength levels
DX ≥ 40
Strong Trend
DX 20–39
Moderate Trend
DX 10–19
Weak Trend
DX < 10
No Trend
Important: DX tells you how strong the trend is, not which direction. A DX of 60 could mean a strong uptrend or a strong downtrend — you need +DI vs -DI to know the direction.
How DMI is calculated
- Calculate the True Range (TR) for each day — the largest of: high − low, |high − previous close|, or |low − previous close|
- Calculate +DM (positive directional movement) and -DM (negative directional movement) based on how today's high/low compares to yesterday's
- Apply Wilder Smoothing to TR, +DM, and -DM over the chosen period (default: 8 days)
- +DI = smoothed(+DM) / smoothed(TR) × 100, same for -DI
- DX = |+DI − -DI| / (+DI + -DI) × 100
Wilder Smoothing is similar to an exponential moving average but uses a different formula: smoothed(t) = (prev × (period − 1) + current) / period. It reacts more slowly than a standard EMA, which reduces noise in the indicator.
Trend Oscillator — overbought or oversold?
The Trend Oscillator is a variant of Williams %R. It answers a simple question: where is the current price within its recent high-low range?
Formula:
Oscillator = ((highest_high − close) / (highest_high − lowest_low)) × −100
Where highest_high and lowest_low are calculated over the lookback period (default: 42 days).
Overbought (0 to −25)
Price is near the top of its recent range. The asset has been strong — but may be extended.
Neutral (−25 to −75)
Price is in the middle of its range. No extreme reading in either direction.
Oversold (−75 to −100)
Price is near the bottom of its recent range. The asset has been weak — but may be due for a bounce.
Key insight: “Overbought” doesn't mean “sell” and “oversold” doesn't mean “buy.” Strong trends can stay overbought for weeks. These labels describe where the price is, not what it will do next.
How they work together
DMI and the Oscillator answer different questions. Together, they provide a more complete picture:
Strong trend + Overbought
High DX with +DI > -DI and oscillator near 0. The trend is strong and bullish, but the price has run far. Could continue or pull back.
No trend + Oversold
Low DX with oscillator near −100. No clear direction, and the price is at the bottom of its range. Could be a base-building pattern or continued weakness.
Moderate trend + Neutral
Medium DX with oscillator around −50. A trend exists but isn't extreme in either dimension. The most ambiguous reading.
Strong trend + Oversold
High DX with -DI > +DI and oscillator near −100. A strong downtrend that has pushed the price to the bottom of its range.
Educational content only — not investment advice, recommendations, or a suggestion to act. Past performance is not indicative of future results. Your decisions are your own. Full disclaimer.
See it in action
Pick a ticker and adjust the DMI and oscillator periods. Watch how the indicators respond to different market conditions — trending periods vs choppy sideways periods.
What to notice:
- DX spikes correspond to strong trending periods — look for sustained moves where +DI and -DI are far apart
- DX near zero means +DI and -DI are close together — no clear direction, choppy price action
- Oscillator extremes (−25 or −75) often coincide with short-term reversals, but strong trends can keep the oscillator in overbought/oversold territory for weeks
- Adjust the periods — shorter periods react faster but generate noisier signals; longer periods are smoother but lag more
Your turn
Consider common behavioral patterns. Some investors buy into falling stocks (“it's cheap now”) without checking whether the trend is actually getting weaker. Others hold through extended overbought periods without reassessing.
These indicators don't prescribe action — but they help describe what is happening with more precision. Clearer descriptions of market conditions support more informed analysis.
Reflect in your JournalWhat you've learned
- -The DMI measures trend strength (DX) and direction (+DI vs -DI) using Wilder Smoothing — it tells you how strong a trend is, not just that one exists.
- -DX levels classify trends: Strong (≥40), Moderate (20-39), Weak (10-19), No Trend (<10). DX doesn’t tell you direction — only +DI vs -DI does.
- -The Trend Oscillator shows where the price sits within its recent range: near the high (overbought), near the low (oversold), or in between (neutral).
- -“Overbought” doesn’t mean “sell” and “oversold” doesn’t mean “buy.” Strong trends can stay in extreme zones for extended periods. These are descriptions, not signals.
Want to test this?
Many experienced investors suggest practicing with a paper money account on a reputable broker before risking real capital. Many brokers offer free simulated trading environments where you can test strategies with real market data and no financial risk.
Paper trading lets you build confidence, understand execution, and see how a strategy behaves in real time — without the emotional weight of real money on the line.
Important
Everything on this platform is educational and didactic in nature. We do not provide investment advice, financial advisory, or recommendations to buy or sell any financial instrument. Past performance is not indicative of future results. All strategies shown are historical simulations for learning purposes only. Always do your own research and consult a qualified financial advisor before making investment decisions.
Educational content · Not investment advice or recommendations
We're educators, not advisors. Your decisions are your own. Disclaimer