Stochastic Momentum Index

Stochastic Momentum Index

The Stochastic Momentum Index.This indicator plots the closeness relative to the midpoint of the recenthigh/low range. The Stochastic Momentum Index has two components- %K and %D. %Kis most often displayed as a solid line and %D is often shown as a dotted line.The most widely used method for interpreting the Stochastic Momentum Index isto buy when either component rises above 40 or sell when either component fallsbelow 40. Another way to interpret the Stochastic Momentum Index is to buy when%K rises above %D, and conversely, sell when %K falls below %D periods.It isconstructed by comparing the price to the average of the high-low price rangeover a given period. The result is an oscillator that ranges.

The oscillator is comprised oftwo lines, the SMI and the moving average of the SMI. When the close is greaterthan the midpoint of the range, the SMI will be positive. When the close isless than the midpoint of the range, it will be negative.

IIt is used as a sentiment, ortrend identification indicator, thereby providing a better sense of the overalldirection of the market. The interpretation of the SMI is virtually identicalto that of the Stochastic Oscillator. The most basic pattern to trade from isto buy when the SMI falls below -40 and then returns above it. Sell when theSMI rises above +40 and then falls back below that level. Another tradingsignal is buy when the SMI rises above the moving average, and sell when theSMI falls below the moving average.