Ask Colin

In your article on Directional Movement, you explain the extreme point rule differently to the Equis website. Who is right?

Welles wilder invented the Directional Movement indicator. This is what he wrote in New Concepts in Technical Trading Systems:

(page 47): "The system itself is extremely simple. When +DI crosses above -DI, a long position is taken. The position is reversed [stopped out] when -DI crosses above +DI........

.......There is one more rule in following the Directional Movement System, and that is the Extreme Point Rule.

If you are Long the reverse point [stop loss point] is the low made on the day of crossing. If you are Short the reverse point [stop loss point] is the high made on the day of crossing. Stay with this point, if not stopped out, even if the indexes [+DI and -DI] stay crossed contrary to your position for several days."

The square brackets a re mine. The italics and bolding are Welles Wilder's.

In my article, I interpreted the extreme point rule as:

"The extreme point on the day the DI lines cross should be used as a stop loss level even if the DI lines cross against your position for several days. The extreme point if +DI rises above -DI is the low of the day of the crossing. The logic here is to cut out the frequent whipsaws experienced around DI line crossovers."

I feel that I have accurately represented the work of the inventor of the indicator. However, if Equis are saying something different, it may be that they are using the indicator differently to the way Welles Wilder suggested. This is fine, many indicators are used in many different ways by many technical analysts and traders. The question of right and wrong is not relevant here. What matters is whether the variations actually achieve what you are trying to do with them. Therefore, I would want to test the variation more thoroughly before putting real money on it.

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