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.

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Volatility is the gross price movement from A to B, given a specified minimum price fluctuation value.

You may obtain a ratio with V/DM. Look at a sampling of 50 or 100 charts to get an idea of volatility ranges, then divide the samples into five equal segments as with DM.

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 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

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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