Stochastic Momentum Index Analysis & Stochastic Momentum Index Trading Signals

Developed by William Blau.

Stochastic Momentum Index, SMI indicator is an adaptation of the classic Stochastic Oscillator technical indicator that smoothes out the stochastic oscillations.

Construction of Stochastic Momentum Index Indicator

This indicator is calculated by comparing the price relative to the average of an n number of periods.

Then instead of plotting these values directly, smoothing using an Exponential Moving Average is applied & then the values drawn to form the SMI.

When the closing price is greater than the average of the range, the SMI will move upward.

When the closing price is less than the average of the range, the SMI will move down.

This oscillator ranges between the values of +100 and -100, this indicator is also less prone to whipsaws compared to the stochastic oscillator.

Trading Analysis & Generating Trading Signals

Buy and Sell Signals/ Crossover Signals

The Stochastic Momentum Index can be used to generate buy and sell signals using the method shown below, Buy when the SMI is heading upwards and sell when its heading downwards.

Buy & Sell Signals/ Crossover Signals

Overbought/Oversold Level Trading Crossovers

• Overbought levels above +40
• Oversold levels below -40

Buy signal is generated when this oscillator falls below oversold level and then rises above this level & starts to move upward.

Sell Signal is generated when this oscillator rises above overbought level and then falls below this level & starts to move downward.

Divergence Stocks Trading

The example shown and demonstrated below displays a bearish classic divergence between the price & the SMI. When the Stochastic Momentum Index showed this divergence the price trend reversed and started to move in a downward direction.

Bearish Trading Divergence