The Relative Momentum Index indicator was developed by Roger Altman and first introduced in the journal “Technical Analysis of Stocks & Commodities” in February 1993. The main objective of this indicator, according to the author, is to improve the quality of the classic RSI indicator readings if the price reaches overbought/oversold zones.
What is the Relative Momentum Index (RMI)?
The Relative Momentum Index actually measures the ratio of upward change versus the downward change in price over a given period of bars. The change for each bar is calculated for a given number of bars.
As the case with RSI, the RMI indicator also ranges from 0 to 100 and the 30 and 70 levels are considered as oversold and overbought zones respectfully. Technically, the RMI is analyzed the same way as the RSI. With Relative Momentum Index, simply you can look for buying opportunities when the price reaches around 30 level and you may look for selling opportunities when the indicator value approaches around 70.
Similarly, the Relative Momentum Index reading above 50 is taken as a bullish indication while below the 50 mark is considered as a bearish indication.
RMI Calculation formula
RMI = 100 * N / (H + B), where
N is the number of days;
H is the amount of change in positive closing prices for the period between today and N days ago;
B – the sum of the changes in negative closing prices for today and N days ago.
RMI Indicator Parameters
RMIperiod = 14
MOMperiod = 5
How to use the RMI indicator?
As with all overbought/oversold indicators, the RMI exhibits similar strengths and weaknesses. In strong trending markets, the RMI will remain at overbought or oversold levels for an extended period. In non-trending markets, the RMI tends to predictably oscillate between an overbought level of 70 to 90 and an oversold level of 10 to 30. When the RSI diverges from the price, the price will eventually correct to the direction of the index.
As a classic oscillator of technical analysis, the RMI indicator allows you to determine the following possibilities for use in trading:
Peaks and troughs
When the indicator reaches and crosses the level of 70 in a uptrend, this is an important signal that the price will not be able to continue the uptrend. The RMI indicator in this case, very clearly indicates the overbought zone, and immediately after the price reaches this area, a fall can begin.
If the indicator reaches and crosses the level of 30 in a downtrend, this is the primary signal that the price has finished forming a correction and will now be able to continue moving upward. In such a situation, an asset can be bought.
The RMI indicator can also generate price action signals, such as “triangles,” “flags,” and a “head and shoulders” pattern, in which a trader can work out even if this model has not formed on the price chart itself.
As an oscillator, the Relative Momentum Index allows you to see the divergence/convergence signals on the indicator line in comparison with price movements. Signals of this kind on the RMI indicator are the most important for decision making, as this signal gives an early sign of reversal and may give a high probability trade entry.
Relative Momentum Index trading strategy
The RMI is an oscillator and as such it has the same advantages and disadvantages as other technical methods, reflecting overbought and oversold conditions. In trending environment the RMI will usually remain at or in proximity to overbought or oversold levels for quite a while. In trading ranges, however, the RMI has a tendency to be more predictable, oscillating between an oversold level (10-30) and an overbought level (70-90).
In technical analysis the RMI indicator is analyzed in the same way the RSI is. A simple trading system based on the RMI indicator would suggest buying when RMI values advance above 30 after being below it and it would suggest selling when RMI values drop below 70 after being above it.
Since RMI readings above 50 are considered as bullish and RMI readings below 50 are considered as bearish, some traders may choose to generate signals on the crossovers of the RMI and 50 center line: sell when RMI decline below 50 and buy when RMI advances above 50.
Third way of using the Relative Momentum Index involves Exponential MA applied to RMI and used as a signal line. In this case the RMI indicator consist of two lines: RMI itself and Signal Line (EMA applied to the RMI). The signals are generated on the crossovers of the RMI and its Signal Line: sell when RMI drops below its Signals Line and buy when RMI raises above its Signal Line.
We are going to learn a straightforward trading strategy based on the overbought and oversold levels.
RMI indicator buy strategy
- The Relative Strength Index value should reach the 30 (oversold level).
- Price should be above the 20 period SMA.
- Wait for the bullish candle to appear before entry.
- We can place stop-loss near the swing low.
- We can exit the trade once the price reaches 70 (overbought level).
RMI indicator sell strategy
- The Relative Strength Index value should reach the 70 (overbought level).
- Price should be below the 20 period SMA.
- Wait for the bearish candle to appear before entry.
- We can place stop-loss near the swing high.
- We can exit the trade once the price reaches 30 (oversold level).
Relative Momentum Index conclusion
The Relative Momentum Index calculates a ratio of upwards changes to downwards changes in prices over N-period bars. The RMI values range between 0 and 100. 30 and 70 are the two levels of oversold and overbought market conditions respectively. The RMI is an oscillator and as such it has the same advantages and disadvantages as other technical methods, reflecting overbought and oversold conditions. In trending environment the RMI will usually remain at or in proximity to overbought or oversold levels for quite a while. In trading ranges, however, the RMI has a tendency to be more predictable, oscillating between an oversold level (10-30) and an overbought level (70-90).
As the RMI indicator is closely related to the RSI, its interpretation and analysis is also similar to the RMI. The RMI indicator is an extremely helpful technical analysis tool that helps to determine the overall trend in the market and buying/selling opportunities. The Relative Momentum Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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