What Is the Stochastic Momentum Index (SMI)?
The Stochastic Momentum Index (SMI) is a technical indicator designed to measure momentum. Developed by William Blau, it refines the classic stochastic oscillator by calculating where the closing price sits relative to the midpoint of the high-low range over a selected period.
Instead of simply oscillating between 0 and 100 like the traditional stochastic, the SMI ranges from −100 to +100, providing traders with more nuanced insight into overbought and oversold conditions.
How the SMI Differs From the Traditional Stochastic Oscillator
While both indicators attempt to measure market momentum, there are key differences:
- Smoother signals: The SMI uses a double-smoothed calculation, reducing noise.
- Zero-centered scale: Unlike stochastic’s 0–100 scale, SMI’s −100 to +100 range highlights momentum direction.
- Clearer divergences: Because of its midpoint reference, divergences with price action often appear more clearly.
This makes the SMI particularly useful for trend confirmation and timing entries/exits.
Stochastic Momentum Index Formula & Calculation
The formula involves several smoothing steps:
- Calculate the midpoint of the high-low range.
- Measure the distance between the closing price and the midpoint.
- Apply double exponential smoothing.
- Express the result as a percentage of half the range.
While the formula is complex, most charting platforms (MT4, TradingView, Thinkorswim) have the SMI built-in.
Standard SMI Settings and Customization
The default settings are:
- %K length: 14
- %K smoothing: 3
- %D smoothing: 3
- Signal line: 3
Traders often adjust these depending on strategy:
- Short-term traders: 5–10 period SMI for faster signals.
- Swing traders: 14–20 period for balance.
- Longer-term traders: 20–40 for smoother signals.
How to Interpret SMI Signals
Overbought & Oversold Levels
- Above +40 to +60 → Overbought conditions.
- Below −40 to −60 → Oversold conditions.
Unlike stochastic, values often stay overbought/oversold in strong trends.
Signal Line Crossovers
- Bullish signal: SMI crosses above its signal line.
- Bearish signal: SMI crosses below its signal line.
Divergences
- Bullish divergence: Price makes lower lows, but SMI makes higher lows.
- Bearish divergence: Price makes higher highs, but SMI makes lower highs.
Stochastic Momentum Index Trading Strategy
1. Trend-Following Setup
- Use a 200-day moving average to define trend direction.
- Take long trades only when price is above the average and SMI gives a bullish crossover from oversold territory.
- Take short trades only when price is below the average and SMI gives a bearish crossover from overbought territory.
2. Swing Trading Setup
- Identify support and resistance zones.
- Enter trades when SMI diverges from price action at these levels.
- Exit when SMI crosses back through the zero line.
3. Day Trading Application
- Apply on 5- or 15-minute charts.
- Combine with VWAP or EMA trend filter.
- Use SMI crossovers near intraday highs/lows for quick momentum trades.
Best Timeframes for the SMI
The SMI is versatile:
- Scalpers/Day Traders: 1m–15m charts.
- Swing Traders: 1h–4h charts.
- Position Traders: Daily or weekly charts.
Combining SMI With Other Indicators
The SMI works best when paired with:
- Moving averages → Trend direction.
- MACD → Momentum confirmation.
- RSI → Overbought/oversold confluence.
- Volume indicators → Confirm strength of signals.
Advantages and Limitations of the SMI
Advantages
- Smoother and more reliable than the stochastic oscillator.
- Highlights momentum direction clearly.
- Useful across multiple timeframes.
Limitations
- Can lag in fast-moving markets due to smoothing.
- Generates false signals in choppy, sideways conditions.
- Should not be used alone—confirmation is key.
Backtesting SMI Strategies (Performance Insights)
Studies show that:
- The SMI performs best when used as a filter, not as a standalone signal.
- Combining SMI with a trend indicator improves win rates by reducing false signals.
- Historical backtests on S&P 500 data suggest that SMI + moving average strategies outperform simple stochastic setups.
Final Thoughts
The Stochastic Momentum Index strategy provides traders with a refined way to measure momentum and identify trading opportunities. By combining SMI signals with broader market context, such as trend filters and volume, traders can increase accuracy and avoid common pitfalls.
