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Traders commonly use SMI Indicator to predict the trend prevailing in the market i. Traders believe that a market is bearish if its SMI Output is below On the other hand, an SMI Output of above 40 for a particular market conceives a bullish trend. In order to interpret the outcome of SMI, traders have developed specific trade points. Similarly, if SMI falls below , a Purchase signal is indicated. Another common trading sign is that, when SMI passes moving average from below, a purchase signal is generated.
The following chart shows the bullish entry trade signal generated by the Stochastic Momentum Index. Trading cannot be based on short term extreme positions only. There must be a mechanism to check the trendiness of market.
R-Squared Indicator is commonly used by traders to determine the trendiness of market. If the outcome of Indicator like R-Squared is a non-trending market then outcome of SMI is reliable and gives effective results. Contrarily, if a trending market is predicted by Trendiness Indicators then traders can use Oscillators to determine the direction of trend. In this way, traders can base their transactions in the direction of market trend predicted by Oscillator. William Blau found 1-day SMI with large smoothing periods to be more sensitive to the current close rather than the high and low of the day.
Short term extreme positions are indicated by outcome of SMI. Traders prefer not to trade in the direction of trendiness anymore. Similarly, when SMI falls below , an oversold condition holds. The SMI, since it uses a range of data, is considered to be a better and faster read on the changes in momentum. The oversold level is the green line and the overbought level is the red line.
As with any trading indicator, I would add some other type of confirmation such as price patterns or price action before placing a trade. On this chart, we can see that the stochastic momentum index had a run of good trading signals nailing the turning points but we were also in a trading range. Once price began to trend, the SMI oversold signals gave little upside as price was trending downwards. The lesson here is while trading oversold and overbought in a trading range may work, blindly following those trading signals in a trend market can be painful.
Ensure you can see defined support and resistance levels before thinking about using the SMI in this manner. In this case, we are looking for momentum divergence where in an uptrend price is putting in a higher high but the SMI does not. The opposite is also true. This is a chart of Bitcoin with 2 momentum divergences bearish divergence that we would be interested in. It is never smart to simply trade these as sell signals but on this chart, we have failure tests of the highs.
If you choose to trade divergence, your stop loss would go just above the swing high for short trades and the swing low for long trades. The reason is that if this trade fails, the overall trend direction may be regaining ownership of the chart. The blue lines on the indicator are a buffer zone.
If crosses happen within the buffer zone, they are ignored. This is to help prevent getting chopped up in markets that have no direction. The logic is that once the signal lines start to climb, we are seeing a momentum increase and choppy market conditions are less likely. I purposely left out profit taking and trade management plans deciding to stick with the usage of the SMI. While the SMI will point out divergences and momentum shifts, it is my feeling that you must add in other confirming factors, including price structure.
As an example, if price is sitting on support and begins to bounce, use a cross to the upside of the SMI as your trade entry.
Stochastic Oscillator is primarily used to calculate the gap between the Present Shut and Current Excessive/Low Vary for n-period. Stochastic Momentum Index. Stochastic momentum with arrows is a mt4 (MetaTrader 4) indicator and it can be used with any forex trading systems / strategies for additional confirmation. SMI indicator for MT4 is an advanced version of the stochastic oscillator with the best forex trading BUY and SELL signals.