The Dynamic Momentum Index indicator was invented by Tushar Chande and Stanley Kroll as a relative strength index. The dynamic momentum is a technical indicator that is used to decide if an asset is overbought/oversold. They will generate trade signals in the direction of the trend while a market is trending. The dynamic momentum index uses a few periods in its calculation when volatility is high. There are more periods when volatility is low. When the indicator is below 30 the price of an asset is considered oversold. And if the indicator is above 70 the price is considered overbought.
The aspect required to calculate that indicator has been simplified to allow the user with full customization of this indicator. They include the price, standard deviation periods, MA of standard deviation periods, DMI period as well as the upper and lower bounds for DMI periods. They will determine the range of the dynamic periods that can fluctuate between them. DMI indicator has two basic indicator plots as a secondary display plot as a dynamic period. They will allow users to have knowledge about what period’s length is being used for any given bar in the chart.
Dynamic Momentum Index=RSI=100-100/1+RS
Calculation of Rs requires a look back period which changes by creating a DMI to calculate how many periods we use for DMI: StdA=MA10 of StdC5Vi=StdAStdC5TD=INTVi14TD defines how many periods are used for each RS value Max=30 TD Min=5where: Std=Standard deviationMA10=10-Period simple moving averageStdC5=Five-day standard deviation of closing pricesTD Max=Use 30 if TD is greater than 30TD Min=Use 5 if TD is less than 5RS=Relative strength
CalculationThe dynamic momentum index uses the RSI formula. DMI uses the varying look back period between 5 and 30 for each calculation of RS. The RSI is fixed to 14 to find the lookback period required for each calculation of RS. Then take 10-periods with moving average at a standard deviation and then calculate StdA. Then divide step one by step two to get VI. Then we calculate TD by dividing 14 VI. Here we use integers for the result to represent time periods and can’t be faction/decimals.TD is limited to between 5 and 30. If it goes over 30 we use 30. And if it goes under 5 we use 5.TD is the period used in the RS calculation. Calculate using the number of periods dictated by TD. Then we repeat as each period ends.
view moreThe indicator is looking at the past price movement and not inherently predictive in nature. While the indicator lags go less than the RSI as there is lag. So when prices are falling an asset will remain in oversold territory for a long time. The indicator moving out of oversold territory that doesn't mean the price will rise. So with an uptrend, the price could stay overbought for a long time when it moves out of overbought territory that doesn't mean the price will fall.
DMI = DynamicMomentum (13, 8, 5);
Plot (EMA (DMI, 3),"Dynamic Momentum Index", colorGreen, chartLine, StyleSymbolNone);
Plot (SMA (DMI, 5),"Trigger Line", colorRed, chartLine, StyleSymbolNone);
The dynamic momentum index is used on trading platform charts to help filter potentially. It is the best indicator among many. They work the same as RSI indicators, combining the resistance and support levels to enhance trading signals.
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