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Dynamic
Momentum Index
Description
The
Dynamic Momentum Index (DMI) was developed by
Tushar Chande and Stanley Kroll.
The indicator is covered in detail in their
book The New Technical Trader.
The
DMI is identical to Welles Wilder’s Relative
Strength Index except the number of periods is
variable rather than fixed.
The variability of the time periods used in
the DMI is controlled by the recent volatility of
prices. The
more volatile the prices, the more sensitive the
DMI is to price changes.
In other words, the DMI will use more time
periods during quiet markets, and less during
active markets. The
maximum time periods the DMI can reach is 30 and
the minimum is 3. This
calculation method is similar to the Variable
Moving Average, also developed by Tushar Chande.
The
advantage of using a variable length time period
when calculating the RSI is that it overcomes the
negative effects of smoothing, which often obscure
short-term moves.
The
volatility index used in controlling the time
periods in the DMI is based on a calculation using
a five period standard deviation and a ten
period average of the standard deviation.
Interpretation
Chande
recommends using the DMI much the same as the RSI.
However, because the DMI is more sensitive
to market dynamics, it often leads the RSI into
overbought / oversold territories by one or two
days.
Like
the RSI, look for overbought (bearish) conditions
above 70 and oversold (bullish) conditions below
30. However,
before basing any trade off of strict
overbought/oversold levels using DMI or any
overbought/oversold indicator, Chande recommends
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, you can use the
DMI to enter trades in the direction of the trend. |
