Understanding the Positive Directional Index (PDI)

The Positive Directional Index (PDI) is a component of the Directional Movement System, developed by J. Welles Wilder. It helps to determine the strength of a trend by comparing the positive directional movement with the negative directional movement. The PDI is used to analyze whether an uptrend or downtrend is strong and to gauge the overall trend strength.

What is the Positive Directional Index (PDI)?

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

How is the Positive Directional Index (PDI) Calculated?

The PDI calculation involves several steps:

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

Formulas:

1. Positive Directional Movement (+DM):

   +DM = Current High - Previous High

2. True Range (TR):

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

3. Smoothed Positive 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. Positive Directional Index (PDI):

   PDI = (Smoothed +DM / Smoothed TR) * 100

Formula

Here’s a summary of the key formulas:

+DM = Current High - Previous High
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
PDI = (Smoothed +DM / Smoothed TR) * 100

Uses of the Positive Directional Index (PDI) Indicator

The PDI is used to evaluate the strength of an uptrend:

1. Trend Strength

• High PDI Value: Indicates strong upward movement.
• Low PDI Value: Suggests weak upward movement or potential downtrend.

2. Trend Comparison

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

3. Confirmation with ADX

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

Parameters

Here are the parameters used to configure the PDI indicator:

• Data Offset (pod):

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods used for calculating the PDI. 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 PDI.

• Period (period):

  • Default Value: 14
  • Min Value: 1
  • Max Value: 300
  • Description: The number of periods over which the PDI 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 Positive Directional Index (PDI) Indicator

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

Limitations of the Positive Directional Index (PDI) Indicator

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

Conclusion

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