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 Apple (AAPL) shows prices peaking on October 2, 2018 and PDI peaking on October 24, 2018. PDI always peaks after prices peak.
Another Upside to Downside Example
Netflix (NFLX) peaked on July 8, 2018 and PDI peaked on July 15, 2018.
Moving From the Price Downside to the Price Upside (Spotting a Price Bottom)
For Apple (AAPL) downside prices bottomed on May 11, 2016 and PDI bottomed on July 7, 2016. PDI always bottoms after prices bottom.
Another Downside to Upside ExampleKulicke and Soffa Industries (KLIC) made a double bottom om March 8, 2009 and PDI bottomed on March 29, 2009.
See the Price Direction Indicator (PDI) Calculator and Chart Maker which lets you do a PDI chart for any stock.