This video on the Stochastic Momentum Index Indicator will most likely be a revelation to most traders. I don’t see a lot of people trading this one, but it can be used very profitably.
You’ll learn how to use then energy of the stochastic momentum indicator to keep you on the right side of the market. It aligns with my principle of always trading in the direction of the dominant energy of whatever market your day trading or swing trading.
Enjoy the video and please leave your comments below (even if they’re negative!).
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Today I am going to show you this stochastic momentum index indicator, and how it can help you get into trades and when to exit trades. These are two of the things that I find people have the most problems with, and today I am going to help you with both of them, with one indicator.
Having said that, never use this by itself. Use it with other things. Now I’ll demonstrate that with you right now.
STOCHASTIC MOMENTUM INDEX INDICATOR: FIRST THINGS FIRST.
First of all let’s open up the Stochastic Momentum Index Indicator. You can see the parameters I use. It’s called SMI or Stochastic Momentum Indicator. I use lengths that are different than are going to be defaults in your indicators. When you open it up, this is what I use. 15 for D and 6 for K. I like those, but you can fool around and play with other inputs if you want to. Upper and the lower, horizontal lines, 40 and negative 40 that is traditional. And then it draws 2 lines, the SMI, I am going to use green for that, and the average of the SMI. And we will use red for that. Now let’s see how to trade it.
If you go up here, as I said you don’t want to trade this by itself. So here is one of the rules. In top dog trading, we call it the rule of 3. We’ve gone, we’ve approached this price level 3 times. And failed to break through it. So the rule of 3 says that after the 3rd attempt, if the market doesn’t break through a price level. then it’s unlikely to breakthrough any time soon.
Based on that, I’d be happy to take the trade in the opposite direction. That is likely going to be final resistance. At least for the near future. But we need to add some sort of confirmation for that, and that’s how I use SMI. Use it really as a confirming indicator.
YOU NEED CONFIRMATION
So since we’ve got this, now I’ve got something to confirm that. And that here is the green line. Goes below the red line. Again green line is the Stochastic Momentum Index Indicator. Red line is its average. And this is going down. Momentum often leads price by the way. That’s one of the long run characteristics of momentum. And so we get our confirmation of trend change here. And we could even take a first cycle high after the cross of the moving averages here. By the way this is the 50 period simple moving average, and then the black one’s is 15 exponential moving average for your reference.
And oh by the way, you will need something that helps time your entries, obviously. The Stochastic Momentum Index Indicator is a big broad stroke indicator, it’s not really for precision, accurate timing, if you want my timing indicator, I’m happy to share that with you. Just shoot me a quick email at Barry@TopDogtrading.com and I will give you access to that for free.
But for today’s lesson, lets continue on. What we’re doing is we’re confirming the direction of the new trend now, down with this indicator, saying that yes the direction is down. But you know what, it’s also going down with some velocity. With some speed, some strength. And that’s the only time we want to trade in the direction of the trend is when I say there is a strong trend. This indicates it’s a strong trend. I like to primarily use this to confirm the direction that I am trading it.
ANOTHER GREAT SIGNAL YOU CAN USE FOR DAY TRADING OR SWING TRADING
Now here is another sign that you need to be aware of. That’s when the 2 lines of the Stochastic Momentum Index Indicator just kind of hover each other. Then that means there’s no momentum. There’s no strength. And so that’s a good time to just keep your powder dry. Not take any trade at all. You can see what happens here. And you know what, it’s interesting because the market does pop up here. But it doesn’t sustain to the upside, does it? Looks like maybe we are getting the trend started. But there is no strength behind it. And therefore guess what, it doesn’t continue and it actually comes down. So this is a second Stochastic Momentum Index Indicator signal to look for when the lines are on top of each other. Best to just stay out of the market.
And one last piece of advice on how this thing works. When you get trends, that move up and then they just go sideways for a while. You see how long it’s going sideways. Well when the market goes sideways for a while, the trend is still up, isn’t it. It’s up, it’s up, and it’s up. 50 MA is still up. That’s the green line. We do put in a 5 wave trend, the average trend. But in between, each one of our waves, waves highs, 1, 3 and 5. What happens, you get a sideways movement for quite a while on the Stochastic Momentum Index Indicator.
INTERPRETING THE SMI (STOCHASTIC MOMENTUM INDICATOR)
That means that the acceleration, the velocity, the strength has come out of the market. So the Stochastic Momentum Index Indicator will show you that. And so the green line will not stay above the red line during those times. Don’t expect it to. Same thing happens here. We just go sideways for a bit, until we popup there.
In these situations, what you do is you just have to wait for the green line to come back up above the red line. So sometimes come in a little early like this one, sometimes comes in a little bit later, like this one. And you can obviously adjust the settings if you may come faster than the ones I have. You get quicker crosses, but you also get some false crosses like a cross here.
INDICATORS ARE NEVER WRONG!
But anyway the indicator is not doing anything wrong. Indicators are never wrong by the way. They are just simply mathematical formulas. So they are doing the right thing. You puts some values in one side, and it pops the different value out the other side. It’s always correct based on the math of the indicator. But understanding how it works, and why this happens is very important. So that you’ll say, ‘Oh well this thing isn’t measuring the momentum of the trend.’ Yes, it actually is.
Momentum has come out of the trend during this time and it’s indicating that accurately. So during these long complex retraces, don’t expect the green line to stay above the red line or whatever colors you put to it. It’s not supposed to. It’s actually telling you something that’s useful.
So there you go, I like to show all these different examples, so that you don’t think, ‘Oh my gosh this is the Holy Grail. There is no Holy Grail. Well, if there is a “Holy Grail” it’s really between your ears. Getting your head straight, getting you head together, getting attitude right, developing patience, and of course having a successful trading methodology, which has a number of variables to it. Not only indicators but specially risk management, money management. That has a positive expectancy over a large sample of data. That’s what trading is really about. Putting all those things together.
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