Stochastic Momentum Index Forex Trading Technical Analysis Signals
Developed by William Blau.
The Stochastic Momentum Index, SMI indicator is an adaptation of the classic Stochastic Oscillator technical indicator which smoothes out the stochastic oscillations.
Construction of Stochastic Momentum Index Indicator
This indicator is calculated by comparing the currency 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 and then the values plotted 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 downwards.
This oscillator ranges between the values of +100 and -100, this indicator is also less prone to whipsaws compared to the stochastic oscillator.
Forex Trading Technical Analysis & How to Generate Trading Signals
Buy and Sell FX Trading Signals/ FX Crossover Trading Signals
The Stochastic Momentum Index can be used to generate buy and sell signals using the technique shown below, Buy when the SMI is moving upwards & sell when its moving downwards.
Buy & Sell FX Trading Signals/ FX Crossover Trading Signals
Overbought/Oversold Level FX Trading Crossovers
- Overbought levels above +40
- Oversold levels below -40
Buy trading signal is generated when this oscillator falls below over-sold level and then rises above this level and starts to move upward.
Sell Signal is generated when this oscillator rises above overbought level and then falls below this level and starts to move downwards.
Forex Trading Divergence FX Trading
The example below shows a bearish classic divergence between the price and the SMI. When the Stochastic Momentum Index showed this divergence the price trend reversed and started to move in a downward direction.
Bearish Forex Trading Divergence
