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Indicators: Stochastic Momentum Index

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Automated-Trading
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Stochastic Momentum Index:

The Stochastic Momentum Index (SMI) was developed by William Blau and was introduced in the January 1993 issue of Technical Analysis of Stocks & Commodities magazine.

It incorporates an interesting twist on the popular Stochastic Oscillator. While the Stochastic Oscillator provides you with a value showing the distance the current close is relative to the recent x-period high/low range, the SMI shows you where the close is relative to the midpoint of the recent x-period high/low range.

The result is an oscillator that ranges between +/- 100 and is a bit less erratic than an equal period Stochastic Oscillator.

  • When the close is greater than the midpoint of the range, the SMI is positive.
  • When the close is less than the midpoint of the range, it is negative.

The interpretation of the SMI is virtually identical to the Stochastic Oscillator.

Three popular methods include:

  • Buy when the SMI falls below a specific level (e.g., -40) and then rises above that level, and sell when the Oscillator rises above a specific level (e.g., +40) and then falls below that level.

    However, before basing any trade off of strict overbought/oversold levels it is recommended that you first qualify the trendiness of the market using indicators such as r-squared or Chande Momentum Oscillator. If these indicators suggest a non-trending market, then trades based on strict overbought/oversold levels should produce the best results. If a trending market is suggested, then you can use the oscillator to enter trades in the direction of the trend.

  • Buy when the SMI rises above its signal line (dotted) line and sell when the SMI falls below the signal line.

  • Look for divergences. For example, where prices are making a series of new highs and the SMI is failing to surpass its previous highs.

Mr. Blau also notes that a 1-day SMI (with large smoothing periods such as 100) is very sensitive to the close relative to the high and low of the day.

Author: Mladen Rakic

mntiwana
3681
mntiwana  
Automated-Trading:

Stochastic Momentum Index:

Author: Mladen Rakic

Hi Mladen

Thanks for the pretty SMI ver, is as cooperative as it should be  :)

regards

H4

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