Simply speaking, The Dynamic Momentum Index is an adaptive RSI. This means it adjusts itself according to the current volatility of the market. Accordingly, the period length will be shortened during volatile phases and lengthened during calmer market phases, unlike RSI. RSI usually uses 14 periods but the length of periods in DMI changes according to the conditions of the market. The adjustable period length can be chosen from 1 to 500. The most common settings will have a period length ranging from 8 to 30.
Calculation
First of all, the standard deviation is determined over 5 periods and then smoothed simply over 10 periods. Then the quotient V is formed from the ratio of standard deviation over 5 periods to the smoothed standard deviation over 10 periods. The adaptive period length T is calculated from the integer result of the division of 14 by V.
Interpretation
Interpretation is similar to that of RSI. DYMOI oscillates between 0 and 100, whereby a value of 100 shows that the instrument is overbought; one also speaks of maximum “internal strength”. If the DYMOI displays maximum or minimum “internal strength”, a technical reaction must be expected. For the DYMOI too, the 70 and 30 marks indicate overbought and oversold conditions, respectively. Buy signals can be generated if the DYMOI breaks through the 50 mark from the bottom to the top. A sell signal is triggered in the opposite case.
