Introduction to the Price Direction Indicator (PDI)
Investors can use the Price Direction Indicator (PDI) to spot prices tops and bottom. PDI works on the principle that most buy and sell combinations (trades) make money when prices are on the upside. And the longer the upside lasts, the bigger the returns become. But on the price downside, most trades lose money and the losses mount as prices fall further.
The PDI value for each day of an analysis period is the percentage winners (profitable trades) added to the cumulative returns for all trades from the first date of the analysis period to the current date. PDI values increase during a price upside and decrease during a price downside. PDI values can be positive or negative. Because PDI values are not derived directly from prices like moving averages, PDI values, when plotted on a price chart, can be positioned well above or below actual prices. The magnitude of PDI values is not important; it's their pattern that is useful.
A chart of daily or weekly closing prices and PDI values helps you spot tops and bottoms. As prices rise, PDI values tend to rise, and when prices fall, PDI values tend to fall. PDI always peaks after prices peaks and bottoms after prices bottom. Trends in PDI values tend to confirm changes in the direction of prices.
Moving From the Price Upside to the Price Downside (Spotting a Price Top)
The price and PDI chart for Caterpillar (CAT) shows prices peaking on April 18, 2008 and PDI peaking on May 21, 2008. PDI always peaks after prices peak.
The blue PDI line indicates that current PDI values are still on the downside.
Another Upside to Downside Example
Apple (AAPL) peaked on May 13, 2008 and PDI peaked on June 6, 2008
Moving From the Price Downside to the Price Upside (Spotting a Price Bottom)
Archer-Daniels-Midland (ADM) is on the price upside according to the
PDI values for the January 2, 2008 through February 5, 2009. The blue
PDI line is moving up after PDI bottomed on November 7, 2008. Prices bottomed
on October 9. PDI always bottoms after prices bottom.
The blue PDI line indicates that current PDI values are on the upside.
Another Downside to Upside Example
Family Dollar (FDO) bottomed on January 15, 2008. PDI bottomed on February 6, 2008.
See the Price Direction Indicator (PDI) Calculator and Chart Maker which lets you do a PDI chart for any stock.