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 Relative Momentum Index (RMI)?
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
We are going to learn a straightforward trading strategy based on the overbought and oversold levels.
Relative Momentum Index 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).
Relative Momentum Index 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 indicator is a refined version of RSI that can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
I would prefer to use the majority of technical indicators such as the Relative Momentum Index indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Relative Momentum Index indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Relative Momentum Index indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Relative Momentum Index indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.