This indicator was created by Welles Wilder to help determine the strength of trend, whether the trend was positive or negative. He originally developed this indicator with commodities and daily prices in mind. There are three parts to this indicator: The Average Directional Index (measuring the trend strength), the Plus Directional Indicator (+DI) and the Minus Directional Indicator (-DI) which interpret the trend direction.
When using this indicator, we suggest making sure you add two levels to the properties of this indicator. The levels would be 20 and 40. The significance of these levels helps determine when you have a trend. Wilder considered anything below 20 to indicate the lack of a trend. He also considered anything above 25 to be a good trend. Most people will just have a level at 20, but there is nothing wrong with adding a level at 25 as well. The level at 40 is considered to be a really strong trend. At these levels, you can still have a strong trend, but there is a greater likelihood that it will begin to weaken.
The idea of the +DI and –DI is that when the Plus line is above the Minus line, it is more bullish. When the Minus line is above the Plus line, it is more bearish. In reality, it is best to use this with other analysis such as moving averages or trend lines to determine the actual trend.
If the trend is bullish, a good entry would be when the Plus line crosses above the Minus line. You could also use the Minus line crossing above the Plus line as an exit from a bullish trend trade.
If the trend is bearish, a good entry would be when the Minus line crosses above the Plus line. You could exit from a bearish trend trade when the Plus line crosses above the Minus line.
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