The Stochastic Momentum indicator (Stochastic Momentum Index, SMI) was developed by William Blau and was firstly introduced in the January 1993 issue of the Technical Analysis of Stocks & Commodities magazine.
It contains an interesting interpretation of the popular Stochastic oscillator. While the Stochastic provides a value that reflects the distance from the current closing of the candle, close to the recent high/low range for x periods, the SMI shows where the closing price is close to the midpoint of the current high/low range for x periods.
The result is an oscillator the value of which fluctuates in the range of +/- 100. It is a bit more ordered than the equal period Stochastic.
- If the closing is higher than the range midpoint, the SMI has a positive value.
- If the candle has closed lower than the range midpoint, the oscillator value is negative.
The interpretation is almost identical to the classic Stochastic.
It includes three popular methods:
- Buy when the SMI falls below a certain level (for example, -40) and then rises above it; sell when the oscillator rises above a certain level (for example, +40) and then falls below it. However, before you base trading on strict overbought/oversold levels, it is recommended to first determine the market trendiness using indicators such as the Chande Momentum Oscillator. If these indicators point to a flat market, then trades based on overbought/oversold levels will give better results. If a trend market is fixed, you can use the oscillator to enter the market in the trend direction.
- Buy when the SMI rises above its signal (dashed) line and sell when it falls below it.
- Search for divergences. For example, find where prices are forming series of new highs, while the SMI isn’t updating its previous highs.
The indicator view in the chart.
The indicator has the following parameters:
Period %K - setting of the %K period for the Stochastic indicator.
Period %D - setting of the %D period for the Stochastic indicator.
Exponential moving average - set the exponential moving average period.
Panel/Moving average period - selection of the indicator location in the chart:
- New panel
Bottom Band, Top Band, Middle Band
Show value - display of the indicator value on the price scale on the left.
Scale/Auto-scaling - if this option is on, the scale will be automatically calculated, based on the minimum and maximum indicator values, so that the indicator would fit in the chart.
Color - color setting of the indicator.
Visual type - visual setting of the indicator display in the chart:
- Up arrow
- Down arrow
- Axis label
Line style - setting of the line display style:
- Dash - dot
- Dash - dot - dot
Width - setting of the indicator line width.
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