✔️ Information reviewed and updated in November 2023 by Eduardo López
Stochastic not only represents one of the most used indicators in technical analysis, but has served as an inspiration for many traders who have been in charge of developing new indicators based on the original. And precisely one of these indicators is the Stochastic Momentum Index (SMI) or the also known Stochastic Inertia Indicator.
Stay to read more about this important indicator and become an expert when conducting a technical analysis.
➡✨ What is the SMI and how is it calculated?
The SMI was developed by William Blau, who presented it in society through the magazine "Technical Analysis of Stocks & Commodities" in 1993, since then this indicator has been used to perform technical analysis.
This indicator bases its calculations on the position of the closing price with respect to the existing range between the minimum and maximum of a certain period. However, Stochastics often use the midpoint of that same range as the cornerstone of their operations.
The following formula will allow you to correctly calculate the indicator:
SM (q) = Close - 0.5 (HH: q + LL: q)
Er = EMA period r
Es = EMA period s
HH: q = maximum in a period q
LL: q = minimum in a period q
You must not forget that This indicator is usually accompanied by a signal line very similar to the stochastic, which is actually an exponential average of the period between 3 and 12.
➡✨ How is the SMI interpreted?
The indicator can move between +100 and -100, although normally in technical analysis it is considered that above +40 is overbought and below -40 is oversold. One of the signals that you should take into account is the crossing of the SMI with its average, since when the SMI is above the signal line, the trend is upward, and so it happens in the opposite way.
You should not forget that the most important signals that this indicator generates are the divergences between the price and the indicator. And if we want to talk about trading strategies, This indicator is applied to the stochastic moment index, as it is based on the same rules, but different formulas are used.
➡✨ Why should you use it?
This indicator is characterized by others by its multiple forms of use such as:
- If you apply a very high value to the variable q the SMI will replicate the shape of the price curve, however, it will eliminate the high frequency noise with minimal delay.
- If the configuration of a q is low, and the difference r and a are very high, what happens is that the high frequency fluctuations will be eliminated, leaving only a smoothed curve that in the future can be used to determine the trend.
- You can apply different trading strategies with this indicator.
- It is possible to combine it with other technical analysis instruments.
- Easy to set up and use.