Stochastic Momentum Index Gold Trading Analysis and Stochastic Momentum Index Trading Signals

Developed by William Blau.

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

Construction of Stochastic Momentum Index Indicator

This indicator is calculated by comparing the xauusd 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 drawn to form the SMI.

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

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

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

XAUUSD Analysis and Generating Trading Signals

Buy & Sell Gold Trading Signals/ Crossover Signals

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

Buy & Sell Gold Trading Signals/ Crossover Signals

Overbought/Oversold Level XAUUSD Trading Crossovers

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

Buy trading signal is generated when this oscillator falls below over-sold level & then rises above this level and starts to move upwards.

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

Divergence Gold Trading

The example illustrated and explained below shows a bearish classic divergence between the xauusd price and the SMI. When the Stochastic Momentum Index showed this divergence the xauusd price trend reversed and started to move in a downward direction.

Bearish XAUUSD Trading Divergence