SMI Ergodic Indicator/Oscillator

▮ Introduction

The Stochastic Momentum Index Ergodic Indicator (SMII) is a technical analysis tool designed to predict trend reversals in the price of an asset.
It functions as a momentum oscillator, measuring the ratio of the smoothed price change to the smoothed absolute price change over a given number of previous periods.

The Ergodic SMI is based on the True Strength Index (TSI) and integrates a signal line, which is an exponential moving average (EMA) of the SMI indicator itself.
It provides a clearer picture of market trends than the traditional stochastic oscillator by incorporating the concept of "ergodicity", which helps remove market noise.

On ther other hand, the Stochastic Momentum Index Ergodic Oscillator (SMIO) is a histogram that measures the difference between TSI and it's signal line.
By default, in TradingView both SMII and SMIO are provided independently.

Here in this script these two indicators are combined, providing a more comprehensive view of price direction and market strength.


▮ Motivation: why another indicator?

The intrinsic value of this indicator lies in the fact that it allows fine adjustments in both calculation parameters, data source and visualization, features that are not present in the standard indicators or similar.
Also, trend lines breakouts and divergences detector were added.


▮ What to look for

When using the indicator, there are a few things to look out for.

First, look at the SMI signal line.
When the line crosses above -40, it is considered a buy signal, while the crossing below +40 is considered a sell signal.

Also, pay attention to divergences between the SMI and the price.
If price is rising but the SMI is showing negative divergence, it could indicate that momentum is waning and a reversal could be in the offing.

Likewise, if price is falling but the SMI is showing positive divergence, this could indicate that momentum is building and a reversal could also be in the offing.

Divergences can be considered in both indicator and/or histogram.

Examples:










▮ Notes

The indicator presented here offers both the "SMII" and the "SMIO", that is, the "Stochastic Momentum Index Ergodic Indicator" together with the "Stochastic Momentum Index Ergodic Oscillator" (histogram), as per the documentation described in reference links.

So it is important to highlight the differences in relation to my other indicator, Stochastic Momentum Index (SMI) Refurbished.

This last one is purely based on the **SMI**, which is implemented using smoothed ratio between the relative range and the high/low range.

Although they may seem the same in some situations, the calculation is actually different. The TSI tends to be more responsive at the expense of being noisier, while the SMI tends to be smoother. Which of these two indicators is best depends on the situation, the context, and the analyst's personal preference.



Please refer to reference links to more info.


▮ References

SMI documentation

SMII documentation

SMIO documentation