Directional Movement (DM) and Volatility (V)
Directional movement is the net price change from price-time point A to price-time point B. In Figure below, visualize a straight line from the low price at the beginning of the first bar of each chart to the high price of the end of the last bar of each chart. The former has high directional movement, and the latter has low directional movement. This is the net price change.
[caption id="attachment_13270" align="alignleft" width="370"](DM) ME -- Directional Movement (DM)[/caption]
There are precise methods for measuring DM, but the core concept is simplicity and avoiding the calculations necessary with indicators.
Volatility is the gross price movement from A to B, given a specified minimum price fluctuation value.
In the conventional classification, volatility would be similar to trading, although a market may possess both high directional movement and high volatility over a specified time. (See Figure below.)
[caption id="attachment_13272" align="aligncenter" width="550"] ME -- Volatility[/caption]
You can plot DM and V either on a 10 × 10 or use a continuum from 1 to 10 where 1 is lowest V and lowest DM and 10 is highest V and highest DM.
ME can also be arranged as a matrix; see Managed Forex, Figure