Volatility-Scaled Stochastic Momentum Index

Summary

This note describes a way to rescale the Stochastic Momentum Index (SMI) against its recent volatility. It first computes the SMI, then forms upper and lower bands around a 24-period exponential moving average using two standard deviations. The current SMI’s position between those bands becomes the output, making the reading relative to its recent dispersion rather than leaving it in the SMI’s original scale.

The document presents an indicator calculation, not a trading rule or a performance study. It gives no test results, threshold guidance, or evidence that the transformed measure improves signals. The band-based ratio can help compare momentum readings across changing volatility, but the note does not discuss how to handle a zero-width band or whether values should be clipped when the SMI moves outside the bands. Its description of the calculation as volatility-related is more precise than implying a conventional fixed-range normalization.

Key ideas

• The indicator begins with an SMI calculated using the stated parameters.
• It centers the SMI on a 24-period exponential moving average by default.
• Its upper and lower reference bands sit two standard deviations from that average.
• The output expresses the current SMI’s location within the band range.
• The document provides no tested trading rules or performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.