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Stochastic Momentum Indicator by William Blau
Appeared in the January 1993 issue of Stocks & Commodities magazine

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 thedistance the current close is relativeto the recent x-period high/low range,the SMI shows you where the close is relative to the midpoint of the recentx-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.
An example formula (see Stochastic Momentum Index) illustrates the calculation of the Stochastic Momentum Index.

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:

  1. 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 overbought/oversold levels it isrecommended thatyou first qualify the trendiness of the market using indicators such as r-squared (see r-squared)or CMO (see Chande Momentum Oscillator). If these indicators suggest a non-trending market,then trades based on strict overbought/oversold levels should produce thebest results. If a trending market is suggested, then you canuse the oscillator to enter trades in the direction of the trend.

  2. Buy when the SMI rises above its signal line (dotted) lineand sell when the SMI falls below the signal line.

  3. Look for divergences. For example, where prices aremaking a series of new highs and the SMI is failing to surpass its previoushighs.
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.
These type of parameters make the RMI useful as a sentiment, or trend identification indicator, thereby providing a better sense of the overall direction of the market.

Stochastic Momentum Indicator

100 * ( Mov( Mov(C - (.5 * ( HHV(H,13) + LLV(L,13))),25,E),2,E)/
(.5*Mov(Mov( HHV(H,13) - LLV(L,13),25,E),2,E)))


Source / From: TOP

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