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Detrended Price Oscillator Understanding the Momentum Oscillator: An Indicator of Trend Strength
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SMI Ergodic Oscillator: An Overview

Introduction to the SMI Ergodic Oscillator

The SMI Ergodic Oscillator (SMIEO) is a technical analysis tool that helps traders and investors identify potential trends and reversals in financial markets. It is based on the SMI Ergodic Indicator, which in turn, is a refinement of the True Strength Index (TSI) developed by William Blau. This article will explore the underlying concepts, calculation, interpretation, and customization of the SMI Ergodic Oscillator.

SMI Ergodic Oscillator

Understanding the SMI Ergodic Indicator

The SMI Ergodic Indicator is a momentum-based indicator that builds upon the foundation of the True Strength Index.

The True Strength Index (TSI)

The True Strength Index (TSI) is a momentum oscillator designed to measure the strength of a price trend. It is calculated using the difference between the current and previous closing prices, smoothed by exponential moving averages (EMAs).

William Blau’s Contribution

A renowned financial analyst, William Blau, developed the SMI Ergodic Indicator to enhance the TSI. Blau’s primary contribution was introducing the Ergodic concept, which calculates the ratio of two EMAs of the TSI. This method improved the effectiveness of the original TSI by offering a more accurate representation of price momentum.

Example scanners based on SMI Ergodic Oscillator

The SMI Ergodic Oscillator can be used in Scanning the market. To see how exactly it can be used in this way, we provide the following samples. Both scanners search the market for stocks using this indicator.

"TS: SMI Long" scanner by Kevin Shah
charts.trendspider.com
“TS: SMI Long” scanner by Kevin Shah
"TS: SMI Short" scanner by Kevin Shah
charts.trendspider.com
“TS: SMI Short” scanner by Kevin Shah

Calculation of the SMI Ergodic Oscillator

The SMI Ergodic Oscillator is derived from the SMI Ergodic Indicator, with a few additional calculations.

Double Moving Averages

The SMI manipulates double moving averages of the price minus the previous price over two different timeframes. This calculation helps smooth the data and reduce noise, ultimately providing a clearer picture of the trend.

The Signal Line and Oscillator

The signal line, an EMA of the SMI, is subtracted from the SMI to create the SMI Ergodic Oscillator. The oscillator is then displayed as a histogram, with positive and negative values reflecting the direction of the momentum.

Interpreting the SMI Ergodic Oscillator

Traders and investors can use the SMI Ergodic Oscillator to identify overbought and oversold conditions, as well as divergences and convergences in the market.

Overbought and Oversold Conditions

When the SMI Ergodic Oscillator reaches extreme values, it may indicate overbought or oversold conditions. Overbought conditions occur when the oscillator reaches high positive values, suggesting that the price is potentially overextended and may reverse. On the other hand, oversold conditions happen when the oscillator reaches low negative values, indicating that the price may be undervalued and could rebound. However, it is essential to note that these extreme values should be used with other technical analysis tools, as they may not always signify immediate reversals.

Divergences and Convergences

Another critical aspect of interpreting the SMI Ergodic Oscillator is recognizing divergences and convergences between the oscillator and the price. A bullish divergence occurs when the price forms lower lows while the oscillator forms higher lows, suggesting a potential trend reversal to the upside. Conversely, a bearish divergence happens when the price forms higher highs, but the oscillator forms lower highs, indicating a possible trend reversal to the downside.

Customization and Optimization

Users of the SMI Ergodic Oscillator can adjust the input, method, and period lengths to adapt the tool to their specific trading style and market conditions.

Input, Method, and Period Lengths

The SMI Ergodic Oscillator’s default input is a security’s closing price. However, users can choose other price inputs depending on their preferences, such as the high, low, or open prices. Additionally, while the default method for calculating moving averages is the exponential moving average (EMA), users can also opt for simple or weighted moving averages. Finally, traders can adjust the period lengths for the moving averages to better suit their trading strategy and the timeframe they are analyzing.

Adapting to Different Market Conditions

By tweaking the parameters of the SMI Ergodic Oscillator, users can optimize the tool for different market conditions. Shorter period lengths may produce more responsive signals, which could be beneficial in fast-moving markets. However, shorter periods may also generate more false signals due to increased sensitivity to price fluctuations. On the other hand, longer period lengths may produce more reliable signals but with reduced responsiveness.

Advantages and Disadvantages of the SMI Ergodic Oscillator

The SMI Ergodic Oscillator offers several benefits to traders, including its ability to identify trend reversals and overbought or oversold conditions. Moreover, its customization options allow for optimization based on individual trading styles and market environments.

However, the SMI Ergodic Oscillator also has some drawbacks. As with any technical analysis tool, it may generate false signals, and relying solely on the oscillator can lead to losses. Additionally, the indicator may not perform well in range-bound or sideways markets, where trend-following indicators struggle.

Example strategy based on SMI Ergodic Oscillator

The SMI Ergodic Oscillator can be used in Testing Strategies. To see how exactly it can be used in this way, we provide the following sample. The strategy tests buying and selling rules built around this indicator.

"TS: SMI Long" strategy by Kevin Shah
charts.trendspider.com
“TS: SMI Long” strategy by Kevin Shah

The Bottom Line

The SMI Ergodic Oscillator is a versatile and customizable technical analysis tool that builds upon the foundation of the True Strength Index. Using double moving averages and incorporating the Ergodic concept, the SMI Ergodic Oscillator helps traders identify potential trend reversals and overbought or oversold conditions. While the tool has limitations, integrating it into a broader trading strategy that includes other technical and fundamental analysis techniques can enhance its effectiveness and help traders make more informed decisions in the financial markets.

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