An oscillator that reflects the momentum of the market using a variable periodicity.
Overview
The Dynamic Momentum Index (DMI) in an oscillator developed by Tushar Chande and Stanley Kroll and described in detail in their book “The New Technical Trader”.
Chande’s DMI on the GBP/CHF Daily Chart 4/10/2011
Source: VT Trader
Interpretation
Chande’s DMI is very similar to Welles Wilder’s Relative Strength Index (RSI). But, unlike the RSI which uses a fixed number of periods, the Dynamic Momentum Index uses a variable amount of periods based on market volatility changes. The number of periods the DMI uses decreases as market volatility increases thereby allowing the indicator to be more responsive to price changes.
The interpretations and trading signals are similar to that of the traditional RSI.
Overbought/Oversold: Readings above 70 indicate overbought conditions while readings below 30 indicate oversold conditions.
Divergences: When price action makes new highs, but the DMI fails to, a bearish divergence signal is provided, and warns of a possible reversal decline . Alternatively, when price action makes new lows, but the DMI fails to , a bullish divergence signal is provided, and warns of a a possible reversal rally,
