Understanding the Negative Directional Index (NDI)

The Negative Directional Index (NDI) is a component of the Directional Movement System, developed by J. Welles Wilder. It measures the strength of a downward trend by comparing the negative directional movement with the positive directional movement. The NDI is used to analyze whether a downtrend is strong and to gauge the overall trend strength.

What is the Negative Directional Index (NDI)?

The Negative Directional Index (NDI) is part of the Directional Movement Index (DMI) system, which also includes the Positive Directional Index (PDI) and the Average Directional Index (ADX). NDI specifically measures the strength of the downward movement in a security's price. It is used together with the Positive Directional Index (PDI) and the ADX to assess the strength and direction of a trend.

How is the Negative Directional Index (NDI) Calculated?

The NDI calculation involves several steps:

1. Determine the Negative Directional Movement (-DM): Calculate the negative directional movement by comparing the previous low with the current low.
2. Calculate the True Range (TR): Compute the true range by considering the current high, low, and previous close.
3. Smooth the Negative Directional Movement and True Range: Use a smoothing function (like a moving average) to smooth these values.
4. Calculate the NDI: The NDI is the smoothed negative directional movement divided by the smoothed true range, multiplied by 100.

Formulas:

1. Negative Directional Movement (-DM):

   -DM = Previous Low - Current Low

2. True Range (TR):

   TR = Max(Current High - Current Low, |Current High - Previous Close|, |Current Low - Previous Close|)

3. Smoothed Negative Directional Movement (-DM):

   Smoothed -DM = Moving Average of -DM over Period

4. Smoothed True Range (TR):

   Smoothed TR = Moving Average of TR over Period

5. Negative Directional Index (NDI):

   NDI = (Smoothed -DM / Smoothed TR) * 100

Formula

Here’s a summary of the key formulas:

-DM = Previous Low - Current Low
TR = Max(Current High - Current Low, |Current High - Previous Close|, |Current Low - Previous Close|)
Smoothed -DM = Moving Average of -DM over Period
Smoothed TR = Moving Average of TR over Period
NDI = (Smoothed -DM / Smoothed TR) * 100

Uses of the Negative Directional Index (NDI) Indicator

The NDI is used to evaluate the strength of a downtrend:

1. Trend Strength

• High NDI Value: Indicates strong downward movement.
• Low NDI Value: Suggests weak downward movement or potential uptrend.

2. Trend Comparison

• NDI vs. PDI: Compare NDI with the Positive Directional Index (PDI). When NDI is above PDI, it suggests a strong downtrend. Conversely, when PDI is above NDI, it indicates a strong uptrend.

3. Confirmation with ADX

• ADX Confirmation: Combine NDI with the Average Directional Index (ADX) to confirm the strength of the trend. A rising ADX with a higher NDI compared to PDI confirms a strong downtrend.

Parameters

Here are the parameters used to configure the NDI indicator:

• Data Offset (pod):

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods used for calculating the NDI. A value of 1 means comparing the current price with the price from the previous period.

• Data Type (data):

  • Default Value: hlc (high low close)
  • Options: hlc (high low close)
  • Description: Specifies the data used for calculating the NDI.

• Period (period):

  • Default Value: 14
  • Min Value: 1
  • Max Value: 300
  • Description: The number of periods over which the NDI is calculated.

• Moving Average Type (ma):

  • Default Value: sma
  • Options: sma, ema, wma, tema, trima, dema, hma, mama, vma, kama, vidya
  • Description: Specifies the type of moving average used for smoothing the directional movement and true range.

Advantages of the Negative Directional Index (NDI) Indicator

• Trend Strength Evaluation: Helps in assessing the strength of downward trends.
• Directional Movement Analysis: Provides insights into the strength of directional movements.
• Comprehensive Trend Analysis: Works effectively with PDI and ADX for a complete trend analysis.

Limitations of the Negative Directional Index (NDI) Indicator

• Lagging Indicator: May react slowly to rapid price changes.
• Requires Confirmation: Should be used in conjunction with other indicators like PDI and ADX for better accuracy.

Conclusion

The Negative Directional Index (NDI) is a valuable tool for traders looking to analyze and confirm the strength of downward trends. By comparing NDI with the Positive Directional Index (PDI) and using the ADX for confirmation, traders can make more informed decisions and enhance their trend analysis strategies. Explore the NDI indicator on Tradeorca to refine your trading approach and gain deeper insights into market trends.