Trade Forex Trading

Stochastic Momentum Index Technical Analysis Signals

Developed by William Blau.

Stochastic Momentum Index, SMI indicator is an adaptation of the classic Stochastic Oscillator indicator that smoothes out the stochastic oscillations.

Construction of Stochastic Momentum Index Indicator

This indicator is calculated by comparing the currency price relative to the average of an n number of periods.

Then instead of plotting these values directly, smoothing using an Exponential Moving Average is applied and then the values plotted to form the SMI.

When the closing price is greater than the average of the range, the SMI will move upward.

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 & -100, this indicator is also less prone to whipsaws compared to the stochastic oscillator.

Technical Analysis and How to Generate Signals

Buy & Sell Signals/ FX Crossover Signals

The Stochastic Momentum Index can be used to generate buy & sell signals using the method shown below, Buy when the SMI is moving upward and sell when its moving downwards.

Buy and Sell Signals/ FX Crossover Signals

Overbought/Oversold Level Crossovers

• Overbought levels above +40
• Oversold levels below -40

Buy signal is generated when this oscillator falls below oversold level & then rises above this level and starts to move upwards.

Sell Signal is generated when this oscillator rises above overbought level and then falls below this level and starts to move downwards.

Divergence Trading

The example below shows a bearish classic divergence between the price and the SMI. When the Stochastic Momentum Index showed this divergence the price trend reversed and started to move in a downward direction.

Bearish Trading Divergence