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The Dynamic Momentum Index or DMI is a technical analysis indicator used to determine overbought and oversold conditions of a particular security. Unlike other overbought/oversold indicators like the Relative Strength Index (RSI), the Dynamic Momentum Index does not use a fixed time period. Instead, the time period, used by this indicator, changes with the change of the asset volatility. The dynamic time period results from the division of the fixed period by a variable calculated using the standard deviation. The number of time periods increases as the asset volatility decreases.
The interpretation of the Dynamic Momentum Index remains the same as with the relative strength index. The security is oversold if the indicator value is below 30; this is usually interpreted a bullish sign. The security is overbought if the indicator value is above 70 and this is usually interpreted as a bearish sign.
The Dynamic Momentum Index raw value should be smoothed with an exponential moving average. A trigger line could also be used to generate signals. Crossovers between this trigger line and the exponential moving average of the DMI produce these trading signals. A bullish signal is generated when the DMI crosses above the trigger line and a bearish signal when the DMI crosses below the trigger line.
The trigger line is simply the simple moving average of the DMI indicator.
Example:
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 DMI indicator accepts three parameters:
Period: Fixed DMI period, which is used to calculate the dynamic DMI period.
StdDevPeriod: Period used to calculate the standard deviation
MAperiod: Period used to calculate the simple moving average of the standard deviation
The Dynamic Momentum Index, DMI, was developed by Tushar Chande and Stanley Kroll. It was introduced in their book the "The New Technical Trader".
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