Stochastic Momentum Index Technical Analysis Trading Signals
Created by William Blau.
Stochastic Momentum Index, SMI is an adaptation of the classic Stochastic Oscillator that smothens the stochastics oscillations.
Construction of SMI Indicator
This indicator is calculated by comparing the price compared to the average/mean of an n No. of price periods.
Then instead of plotting/drawing these values directly, smoothing using an Exponential Moving Average is applied & then the values drawn to form the SMI.
When the closing price is higher than the average/mean of the range, the SMI will go upward.
When the closing price is less than the average/mean of the range, the SMI will go downwards.
This oscillator ranges between the values of +100 and -100, this trading technical indicator is also less prone to fake out whipsaws compared and analyzed to the stochastic oscillator indicator.
Technical Analysis and How to Generate Trading Signals
Buy and Sell Signals/ FX Crossover Signals
The SMI can be used to generate buy and sell trade signals using the method/technique illustrated below, Buy when the SMI is going upwards and sell when its going downward.
Buy and Sell Signals/ Forex Cross over Signals
Overbought/Oversold Level Crossovers
- Overbought levels above +40
- Oversold levels below -40
Buy signal is generated/derived when this oscillator falls below oversold level and then rises above this level and starts to move upward.
Sell Signal is generated/derived when this oscillator rises above overbought level and then falls below this level and begins to move downwards.
Divergence Trading
The exemplification laid-out below indicates a bearish classic divergence between price & the SMI. When the Stochastic Momentum Index showed this divergence the trend reversed & started to move in a downward direction.
Bearish Trading Divergence
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