Stochastic Momentum Index Technical Analysis Signals
Created by William Blau.
Stochastic Momentum Index, SMI indicator is an adaptation of the classic Stochastic Oscillator Trading Indicator indicator that smoothes out the stochastic oscillations.
Construction of SMI Indicator
This trading indicator is calculated by comparing the currency price relative to the average of an n number of price periods.
Then instead of plotting these values directly, smoothing using an Exponential Moving Average is applied and then the values drawn to form the SMI.
When the closing price is greater than the average of the range, the SMI will move upwards.
When the closing price is less than the average of the range, the SMI will move downwards.
This oscillator ranges between the values of +100 and -100, this trading indicator is also less prone to fake outs compared to the stochastic oscillator technical indicator.
Technical Analysis & How to Generate Signals
Buy & Sell Signals/ FX Crossover Signals
The SMI can be used to generate buy & sell trade signals using the method illustrated below, Buy when the SMI is moving upwards & sell when its moving downwards.
Buy and Sell Signals/ Forex Cross over Signals
Overbought/Oversold Level Crossovers
- Over-bought levels above +40
- Oversold levels below -40
Buy signal is generated when this oscillator falls below oversold level and then rises above this level and starts to move upwards.
Sell Signal is generated when this oscillator rises above overbought level & then falls below this level and starts to move downwards.
Divergence Trading
The example below shows a bearish classic divergence between the price & the SMI. When the Stochastic Momentum Index showed this divergence the market trend reversed and started to move in a downward direction.
Bearish Trading Divergence
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