|
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.
|
