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Home What Is SMI Ergodic Indicator? Understanding SMI Ergodic Indicator
TTechnical Indicators


WHAT IS SMI ERGODIC INDICATOR? UNDERSTANDING SMI ERGODIC INDICATOR

 * byQuantStrategy.io Team
 * April 22, 2023
 * 4 minute read

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TABLE OF CONTENTS HIDE

 1. 1. What is SMI Ergodic Indicator?
    2. SMI Ergodic Indicator Formula
    3. How to use SMI Ergodic Indicator in Trading?
    4. SMI Ergodic Indicator vs. Relative Strength Index (RSI)
    5. SMI Ergodic Indicator vs. Moving Average Convergence Divergence (MACD)
    6. Conclusion




Technical analysis involves the use of charts and indicators to predict future
price movements of securities. One of the indicators used in technical analysis
is the SMI Ergodic Indicator.





In this blog post, we will explain the SMI ergodic indicator, its components,
and how it works. We will also compare the SMI Ergodic Indicator with other
indicators and explain its advantages in trading decisions.


WHAT IS SMI ERGODIC INDICATOR?

The SMI (stochastic momentum index) Ergodic indicator is a technical analysis
tool that predicts trend reversals in the price of an asset by measuring the
ratio between the smoothed price change and the smoothed absolute price change
of a certain number of previous periods.





It is calculated in a similar way as the True Strength Index but with added
benefits such as a signal line (an exponential moving average of the SMI Ergodic
line) and double smoothing. The Ergodic indicator helps identify long trends in
prices and is considered accurate for predicting overbought or oversold
extremes, which are used as trading signals. The SMI indicator readings range
from -100 to 100.


SMI ERGODIC INDICATOR FORMULA

The formula for calculating the SMI Ergodic Indicator involves several steps.
Here’s a step-by-step breakdown:

 1. Calculate the price change and absolute values of change for one bar period:
    
    change = close – previous close
    
    absolute change = Abs (change)
    
    where:
    
    the close is the current bar closing price and the previous close is the
    previous bar closing price.

 2. Calculate the First EMA (EMA change1) of the change:
    
    EMA change1 = EMA(change, Length1)
    
    Then calculate the First EMA (EMA abs change1) of the absolute change:
    
    EMA abs change1 = EMA(absolute change, Length1)
    
    Where:
    
    EMA = Exponential Moving Average
    
    Length1 = The length of the first EMA, usually set to 4

 3. Calculate the Second EMA (EMA change2) of the EMA change
    
    EMA change2 = EMA(EMA change1, Length2)
    
    Then calculate the Second EMA (EMA abs change2) of the EMA abs change1 :
    
    EMA abs change2 = EMA(EMA abs change1, Length2)
    
    Where:
    
    Length2 = The length of the second EMA, usually set to 7

 4. Calculate the Stochastic Momentum Index as a ratio between EMA change2 and
    EMA abs change2:
    
    SMI = EMA change2 / EMA abs change2

 5. Calculate the Signal line (Signal) for the SMI:
    
    Signal = EMA(SMI, Length3)
    
    Where:
    
    Length3 = The length of the Signal line, usually set to 4
    
    The resulting value of the SMI Ergodic Indicator oscillates between positive
    and negative values, indicating overbought and oversold conditions in the
    market.

Traders often use crossovers and divergences between the SMI and Signal lines as
trading signals to identify potential trend reversals or continuation patterns.


HOW TO USE SMI ERGODIC INDICATOR IN TRADING?

First, determine the trend direction of the stock or financial instrument you
are trading using a long-term moving average or other trend-following
indicators. This will help you identify whether the trend is bullish or bearish.

It is important to have a clear understanding of the trend direction before
looking for buy or sell signals from the SMI Ergodic Indicator.





Secondly, you may want to keep an eye on the SMI Ergodic Indicator for buy or
sell signals, which can be identified by observing the chart of this oscillator.
When the SMI line crosses above the signal line, it generates buy signals, while
a cross below the signal line creates sell signals.

When an asset is overbought, means that the price has risen too far and too
fast, which may indicate that the asset is due for a reversal. Similarly, when
an asset is oversold, meaning that the price has fallen too far and too fast,
which may indicate that the asset is due for a reversal to the upside.

It’s important to note that this indicator alone should not be relied on to make
trading decisions. Other technical analysis tools, such as chart patterns,
volume indicators, or double moving averages, should be used to confirm the
signal before placing a trade. Also, taking into account the previous price
action and market trends can provide additional insights into the strength of
the signal.

To make more accurate trading decisions, it is critical to employ different
indicators and analysis tools. You can enter a trade once you have validated the
signal and understood the trend direction.


TRADE EXAMPLE:

Suppose you are trading Apple Inc. (AAPL) and have determined that the trend is
bullish based on a long-term moving average. You then look at the stochastic
momentum index Ergodic Indicator and see that the signal line has crossed above
the trigger line, generating a buy signal. To confirm the signal, you look at
the chart and see that the stock is trading above its 20-day moving average and
has formed a bullish engulfing pattern. Based on this analysis, you decide to
enter a long position on AAPL.


SMI ERGODIC INDICATOR VS. RELATIVE STRENGTH INDEX (RSI)

Another momentum oscillator used in technical analysis is the Relative Strength
Index (RSI). The RSI is a technical indicator that monitors the change in price
movements.

The RSI scale is 0-100, with overbought conditions happening above 70 and
oversold conditions occurring below 30. The SMI Ergodic Indicator and the RSI
have comparable properties, however, the SMI Ergodic Indicator provides more
trustworthy signals.

The SMI Ergodic Indicator also delivers more distinct signals of bullish and
bearish divergences and overbought and oversold levels.


SMI ERGODIC INDICATOR VS. MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)

Another momentum oscillator uses in technical analysis is the Moving Average
Convergence Divergence (MACD). The MACD is a technical indicator that evaluates
the difference between two moving averages of various periods.

The SMI Ergodic Indicator and the MACD have comparable properties, however, the
SMI Ergodic Indicator provides more dependable indications. The SMI Ergodic
Indicator also delivers more distinct signs of bullish and bearish divergences
and overbought and oversold levels.


CONCLUSION

The SMI Ergodic oscillator is a type of momentum indicator that can help traders
determine whether a stock is overbought or oversold. The SMI Ergodic Indicator
generates more consistent signals than RSI or MACD.

Traders can make better trading decisions using the SMI Ergodic Indicator in
conjunction with other technical indicators and chart patterns.

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3 COMMENTS

 1. online prescriptions says:
    October 29, 2023 at 6:11 pm
    
    Thanks on your marvelous posting! I definitely enjoyed reading it, you’re a
    great author. I will make certain to bookmark your blog and will often come
    back later in life. I want to encourage you to ultimately continue your
    great writing, have a nice morning!
    
    Reply
    1. QuantStrategy.io Team says:
       November 12, 2023 at 11:23 am
       
       Thank you so much for your kind words!
       We’re thrilled to hear that you enjoyed our team writing and found it
       marvelous.
       Your support and encouragement mean a lot to us.
       
       Reply
       
    
 2. Pingback: Using the SMI Ergodic Indicator to Unlock Market Trends: A
    Complete Guide
    

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