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Wednesday, October 7, 2009

Relative Momentum Index Indicator

Relative Momentum Index or RMI is a momentum indicator developed by Roger Altman and is used for finding oversold and overbought levels. RMI was created by modifying the Relative Strength Indicator or RSI, one of the most popular momentum indicators. RMI effectively shows overbought and oversold levels as RSI does and it also reduces the inconsistent oscillation of the index between those levels (which is its major advantage over RSI).

Relative momentum index has an additional momentum component than RSI. Instead of counting the up and down days from close to close (as RSI does), it counts the up and down days from the close relative to the close x-days ago; and the 'x' needn't be 1 as RSI requires. The modified formula is

RMI = RM / (1 + RM)

Where RM = average up momentum (over 'n' period) / average down momentum (over 'n' period)

Relative momentum index is interpreted as the same as RSI, in fact with RMI the situations can be better interpreted than RSI. The values range from 1 to 100; values below 30 are considered oversold levels and values above 70 are considered overbought levels. The value of 50 is considered a crossing point for a change in trend. In non-trending market, RMI predictably fluctuates between the oversold and overbought levels (often between 10 and 90). Support and resistance level formations and chart patterns, breakouts and divergences within RMI can be used to enter and exit trades. Like any other momentum indicator, RMI can offer better results when used in conjunction with other indicators.

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