Tushar Chande and Stanley Kroll developed the Dynamic Momentum Index indicator and published it in the Stocks and Commodities Magazine in 1993. The indicator can be applied to any market or trading instrument to help find potential trading signals. The DMI is identical to Welles Wilder’s Relative Strength Index except the number of periods is variable rather than fixed. The variability of the time periods used in the DMI is controlled by the recent volatility of prices. The more volatile the prices, the more sensitive the DMI is to price changes. In other words, the DMI will use more time periods during quiet markets, and less during active markets. The maximum time periods the DMI can reach is 30 and the minimum is 3. This calculation method is similar to the Variable Moving Average, also developed by Tushar Chande.
What is the Dynamic Momentum Index?
The dynamic momentum index is a fast-response impulse indicator derived from the relative strength index or RSI. It can respond to changes in momentum faster than RSI and some other momentum indicators since it uses variable periods in its calculation, rather than a fixed number of periods used in RSI calculation.
This can help forex traders anticipate directional changes in the market in advance. Therefore, traders often use it in situations where the market can quickly change direction, such as when the price approaches the primary levels of support or resistance.
The dynamic momentum index serves the same purpose as the RSI, which indicates overbought or oversold conditions that could lead to a market reversal. Readings above 70 indicate overbought conditions, and readings below 30 indicate oversold market.
The daily support point is a significant level of support/resistance, at which the price can quickly change the direction after recovery at this price. Other significant support and resistance levels include major moving averages and existing trend lines. At these levels, forex traders can use a dynamic momentum index to determine how likely the market is to reverse.
How to use the Dynamic Momentum Index in trading?
The Dynamic Momentum Index can be used the same way as any other momentum indicator including the RSI, Stochastic, MACD, etc. The indicator will behave based on the input provided by the user. It needs to be understood that in a volatile market the indicator becomes more sensitive to price fluctuations while in quiet intervals price sensitivity is reduced. This is the perceived advantage of utilizing this indicator.
Overbought/oversold
We can trade the Dynamic Momentum Index indicator oversold and overbought areas. If the price reaches the 70.0 level, it is considered as overbought and we may trade short at that level. Similarly, if the DMI line reaches the 30.0 level, it is considered as oversold and we can enter the long trade at that level.
The 50.0 level
The 50.0 level is very significant while trading the DMI. If the DMI crosses the 50.0 level from bottom to top, this is a possible indication the market will continue up. Similarly, if the DMI line crosses the 50.0 level from top to bottom, there is a possibility the market will decline.
Divergence
This is a condition when there’s disagreement between direction of DMI and the price. In such a case, we could look to trade in the direction of the DMI.
Dynamic Momentum Index trading strategy
We present a simple strategy based on Dynamic Momentum Index that takes further confirmation from the support or resistance levels.
Dynamic Momentum Index trading strategy
- Wait until the price returns close to a certain level of support area.
- Wait for the bullish bar to appear near support area.
- If the Dynamic Momentum Index shows indications of excessive oversold condition, we you can place a long order.
- Place a stop loss on several points on the other side of the support level.
- Exit with profit when the DMI reaches the overbought area.
Dynamic Momentum Index trading strategy
- Wait until the price returns close to a certain level of resistance area.
- Wait for the bearish bar to appear near resistance area.
- If the Dynamic Momentum Index shows indications of excessive overbought condition, we can place a short order.
- Place a stop loss on few points above the resistance level.
- Exit with profit when the DMI reaches the oversold area.
Dynamic Momentum Index conclusion
The Dynamic Momentum Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. You can use the indicator in many ways. It works in a similar way to the RSI indicator and it can be combined with support and resistance levels to enhance the trading signals.
The dynamic momentum index is a momentum indicator used to determine if an asset is overbought or oversold. The variability of the time periods used in the Dynamic Momentum Index is controlled by recent volatility of prices. The more volatile prices suggest the more sensitive Dynamic Momentum Index towards price changes. During quiet market conditions, Dynamic Momentum Index uses more time periods than when more active markets occur. As a result, the Dynamic Momentum Index is more sensitive to fluctuations in the market and displays changes more rapidly than the RSI can.
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