Avoid False Trading Signals with SMI MT4 Indicator
The SMI MT4 indicator also known as the Stochastic Momentum Index indicator is really a great little tool that can help increase your profitability and grow your portfolio size steadily. Do note that no indicator by itself is going to make you a great trader, there is no holy grail and don’t ever believe there will be one.Having said that, the SMI indicator is really a great indicator because it looks for momentum and it confirms entries, which makes it a great filter. A lot of times traders don’t use filters and that’s a critical mistake that newbie traders make that causes them to lose a lot more trades than they need to.
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The SMI MT4 indicator was developed by William Blau in 1993 and it’s the smoother version of the popular Stochastic indicator. If the traditional indicator uses the current close against the periods high and lows the SMI indicator evaluates the current close against the midpoint of the high and low range. Like any other oscillator, the SMI indicator is most useful for predicting turning points which it does by giving a reading of whether a currency pair is overbought or oversold, both of which are conditions that suggest the approach of a turning point.
While divergences re uncommon with the SMI indicator it can be used to reinforce other signals and they constitute strong signals themselves.
SMI MT4 Indicator Settings
The SMI indicator’s output ranges from -100 to +100, so in this regard, we have a 200 point range. On a basic level the closer the indicator’s value is to one of these extremes or limits the more likely s that a reversal will occur. A common standard is that any value above the threshold +40 implies that the currency is overbought and therefore likely to face a pullback while values below the threshold -40 suggest that the currency pair is oversold and may be approaching a turning point.
The preferred settings for the SMI MT4 indicator are the default settings. The indicator has four main components or variables as follows:
- Period_Q assigned by value 2;
- Period_R assigned by value 8;
- Period_S assigned by value 5;
- Signal moving average assigned by value 5;
SMI MT4 Indicator Strategy and Trading Rules
An increase in the indicator’s values beyond +40 constitutes an opportunity to sell in an anticipation of a pullback whereas a decrease in the indicator’s value to a level below -40 constitutes an opportunity to buy in anticipation of a positive trend. Since the indicator includes moving averages further signals can be taken from crossovers between the indicator’s two lines. When the SMI crosses the moving average from below it results in a buy signal, whereas the SMI crosses the moving averages from above it’s a sell signal. Without further ado, these are the buy/sell signal rules of the SMI MT4 strategy:
- Buy signal: When the SMI indicator is below -40 and a crossover happen, buy at the market using a protective stop loss of 30 pips. Take profit when another crossover happens in the opposite direction.
- Sell Signal: When the SMI indicator is above +40 and a crossover happen, sell at the market using a protective stop loss of 30 pips. Take profit when another crossover happens in the opposite direction.
Go to the top Menu – Charts – Indicator List – SMI MT4 Indicator – Levels – Add two lines on the indicator: the +40 and -40 levels.
SMI MT4 Indicator Short and Long Trade Example
This is a universal indicator that can be used on any time frame and on any given currency pair. However, the SMI strategy is a great intraday strategy and it performs better on the 15-minute time frame and in this regard it can be used as a scalping strategy.
In the above chart, we have the EUR/USD 15-minute chart and both a short and long trading opportunities are highlighted. The SMI MT4 indicator does a great job in predicting short-term reversal levels in the market as well as telling you when the take profit.
Recommended Time Frames for SMI MT4 Indicator
Technically speaking, you can use this MT4 indicator for all time frames. However, the shorter the time frame, you will see more fluctuation and possibly more whipsaw which may cause small losses that can eat up your portfolio quickly. We recommend that you use higher time frames like the 4H for better consistency.
SMI MT4 Indicator Download
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Visit our Free MT4 Indicator Download page. We hope you have enjoyed this post as much as we have creating it. Good luck and thank you for your readership.
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