Stochastic Momentum Index (Slow)

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The Stochastic Momentum Index was developed by William Blau as introduced in the in the January 1993 issue of Technical Analysis of Stocks & Commodities. While similar to the Stochastic Oscillator, the SMI displays where the close is relative to the midpoint of the recent high/low range, as compared to the close relative to the recent high/low with the Stochastic Oscillator.

This results is an oscillator that ranges between -100 and +100 and can be a bit less erratic than an
equal period Stochastic Oscillator.The oscillator is comprised of two lines, the SMI (blue) and the moving average of the SMI (red). When the close is greater than the midpoint of the range, the SMI will be positive. When the close is less than the midpoint of the range, it will be negative. The interpretation of the SMI is virtually identical to that of the Stochastic Oscillator.

The most basic pattern to trade from is to buy when the SMI falls below -40 and then returns above it. Sell when the SMI rises above +40 and then falls back below that level. Another trading signal is buy when the SMI rises above the moving average, and sell when the SMI falls below the moving average.

As always, before basing any trades on strict overbought / oversold levels it is recommended that one first qualify the trendiness of the market using an indicator such as R-Squared. If indicators suggest a non-trending market, then trades based on strict overbought/oversold levels should produce the best results.
The Slow Stochastic charts the daily stochastic as well as a five-day moving average of a 12-day interval.

This smoothing of the Stochastic Oscillator is an attempt to reduce volatility and improve signal accuracy.
As with the other stochastic indicators, the signals to look for are oversold securities with values are less than 20 and overbought when greater than 80.

Stochastics work best in broad trading ranges, or in a mild trend with a slight upward or downward bias. The worst market for normal use of stochastics is a persistent trending market that has only minor corrections. It is possible to trade stochastics in a trend by ignoring the usual overbought and oversold levels and entering the market when the end of a reaction against the trend is signaled by a stochastic crossover from any level.

The Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods.Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).
Reading below 20 are considered oversold and readings above 80 are consideret overbought.Buy and sell signals can also be given when %K crosses above or below %D.However,crossover signals are quite frequent and can result in a lot of false signals.

One of the most reliable Stochastic signals is to wait for a divergence to develop from overbought or oversold levels.Once the oscillator reaches overbought levels weit for a negative divergence to develop and then a cross below 80.For a buy signal,weit for a positive divergence to develop after the indicator moves below 20
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The blue line represents the %K line.The red dotted line represents the %D line.
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On this chart you see that a simple Stochastic cross gives too much signals and most of them are false signals.So this isn’t a good wey to use Stochastics.
Let’s see a good way to use Stochastics:
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On this chart you can see a good example of how you can use Stochastics. At point 2, the EUR/USD is slightly below point 1 and Stochastics are slightly above. This is a bullish divergence on Stochastics.
Once Stochastics cross above 20, that’s a good entry point. A bearish divergence will tell you when you should exit the trade.
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Here is a great exit point for this trade. Points “a” and “b” represent a double top on EUR/USD. That’s a bearish signal.
To confirm this double top you can see that there is a bearish divergence on the Stochastics. So, this is a good place to enter in a short sell trade or, at least, to exit your long position.