|
Stochastic Momentum Index
Description
The Stochastic Momentum Index (SMI) was developed by William Blau.
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.
The SMI was introduced in the January 1993 issue of Technical
Analysis of Stocks & Commodities magazine.
Interpretation
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
overbough / oversold levels it is recommended that you first
qualify the trendiness of the market using indicators such as
r-squared or
CMO. 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.
|
