Stochastic Momentum Index

The Stochastic Momentum Index indicator is an advanced oscillator designed to measure the distance of the current closing price relative to the center of the recent high/low range, providing a more refined view of price momentum and potential trend reversals.

Usage

The Stochastic Momentum Index (SMI) can be used to identify overbought and oversold conditions, as well as trend strength. Unlike the traditional Stochastic Oscillator, the SMI oscillates around a zero line and uses double exponential smoothing to reduce noise.

• Trend Identification: When the SMI is above the zero line, it suggests bullish momentum. Conversely, values below the zero line indicate bearish momentum.
• Overbought/Oversold: The indicator includes specific levels such as "Undecided" (25), "Extreme" (40), and "Turning" (97). Values reaching the Turning levels often indicate highly overextended conditions where a reversal might be imminent.
• Signal Line Crossovers: Traders can look for crossovers between the SMI line and its signal line (red) to identify potential entry or exit points. An upward cross suggests a bullish shift, while a downward cross suggests a bearish shift.

Details

This implementation is based on William Blau's work in "Momentum, Direction, and Divergence" (1995). The SMI is calculated by comparing the current close to the median of the high/low range over a specific lookback period (q). This distance is then smoothed twice using exponential moving averages (r and s). This double smoothing makes the SMI much less erratic than a standard stochastic, allowing for clearer trend analysis.

The formula used is:

• SM(q) = close - 0.5 * (HH(q) + LL(q))
• SMI(q, r, s) = 100 * (EMA(EMA(SM(q), r)), s) / (0.5 * EMA(EMA(HH(q) - LL(q)), r), s)

Settings

Period Settings

• q - Stochastic Momentum look back number of bars: Defines the lookback period used to find the highest high and lowest low.
• r - Inner exponential average number of bars: The length for the first EMA smoothing pass.
• s - Outer exponential average number of bars: The length for the second EMA smoothing pass.
• t - Signal exponential average number of bars: The length used to calculate the SMI Signal line.

Level Settings

• Undecided level: Sets the threshold for the initial boundary of momentum strength.
• Extreme level: Sets the threshold for significant momentum readings.
• Turning level: Sets the extreme threshold where the background highlights potential reversal zones.

FAQ

How do I interpret the SMI relative to the zero line? The zero line represents the midpoint of the high/low range. Positive values mean the close is above the midpoint (bullish), while negative values mean the close is below the midpoint (bearish).

What makes the SMI different from a regular Stochastic Oscillator? The SMI uses double-smoothed exponential moving averages and measures the distance from the midpoint, whereas the regular Stochastic measures the relative position of the close within the high/low range without the same level of smoothing.

How can I access this indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.