DMI Stochastic Extreme Indicator

The DMI Stochastic Extreme Indicator shows divergences and overbought/oversold levels. In this guide, we’ll talk about what the indicator is and its trading strategy.

What is the DMI Stochastic Extreme Indicator?

The DMI Stochastic Extreme combines two popular oscillators; Stochastic and DMI (Directional Movement Index). Like both these indicators, the DMI Stochastic Extreme oscillates between certain levels.

It oscillates between 10 and 90. When the signal line is near 10, it is an oversold level, while if the line is near 90, it’s overbought.

Another important aspect of the indicator is to find divergences. You can enter your positions by using divergences or overbought/oversold levels.

DMI Stochastic Extreme Indicator
DMI Stochastic Extreme Indicator

DMI Stochastic Extreme Indicator Strategy

There are three ways to trade with the DMI Stochastic Extreme Indicator.

The first one is looking at the overbought/oversold levels. If the line is near 10, you can look for a potential bullish reversal. Conversely, if the line is near 90, you can anticipate a bearish reversal.

The second way is to look for divergences. A bullish divergence occurs when the price makes lower lows, but DMI Stochastic Extreme makes higher lows. This divergence between the price and the indicator indicates that the downward momentum is slowing, and the price may reverse.

Conversely, Bearish divergence surfaces when the price is making higher highs, but DMI Stochastic Extreme is making lower highs. This indicates that bulls are starting to lose the battle, and we can see a potential bearish reversal.

The third way to trade with the indicator is by combining the divergences and the overbought/oversold levels. If we have a bullish divergence and the signal line is near 10, you can enter long positions or exit short ones.

On the other hand, if we have a bearish divergence and the signal line is near 90, you can take short positions or exit long ones.

DMI Stochastic Extreme Indicator works best on all timeframes; however, it can be prone to whipsaws on shorter timeframes.

Buy Signal

  • The signal must be near 10, or use a bullish divergence strategy.
  • Wait for the price to go up and then enter the trade.
  • You could place a stop-loss at the recent low.
  • You could set take-profit at the recent high, or exit when the signal line reaches near 90.
DMI Stochastic Extreme Indicator buy signal
DMI Stochastic Extreme Indicator buy signal

Sell Signal

  • The signal must be near 90 or use a bearish divergence strategy.
  • Wait for the price to go up and then enter the trade.
  • You could place a stop-loss at the recent high.
  • You could set take-profit at the recent low, or exit when the signal line reaches near 10.
DMI Stochastic Extreme Indicator sell signal
DMI Stochastic Extreme Indicator sell signal

DMI Stochastic Extreme Indicator Pros & Cons

Here are the pros and cons of trading with the indicator.

Pros

  • It can present clear entry and exit points.
  • The indicator is easy to understand.
  • It works on all timeframes.

Cons

  • The price may continue to go up/down even if there is an overbought/oversold level.
  • Trading divergences can be subjective.

Conclusion

The DMI Stochastic Extreme Indicator uses DMI and a Stochastic oscillator and acts as a momentum-based indicator. You can find overbought/oversold levels and apply the divergences strategy with this forex indicator.

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