Dynamic Momentum Index (DYMOI) was made by Tushar Chande and Stanley Kroll. They described it in their book "The New Technical Trader". Its aim is to reveal the oversold and overbought levels. The number of days for its calculation depends on the market volatility. As days for its calculation are being changed everyday the indicator is called "dynamic".
Indicator itself is based on the RSI - Relative Strength Index. The difference is that RSI is calculated on just one chosen period e.g. 14 days but DYMOI changes these days according to market volatility. The more volatile the prices, the more sensitive the indicator is to price changes. In other words, the DYMOI will use more time periods during quiet markets, and less during active markets. Calculation:
- Calculate the Standard Deviation for a chosen time period (reccomendation is 5 days)
- The result is smoothed using a moving average (reccomended is 10 days smoothing)
- Standard Deviation is divided by its smoothed version. So we get the V value.
- Number 14 is divided by the V value and the number is rounded down to the nearest integer. This is called a T value. It should be between 5-30 days. Should it exceed the maximal value, we should adjust the calculation so it wouldn't take into consideration any higher values. This days we get are used next to calculate the RSI indicator.
- Now we can calculate the RSI values for every single day.
As the DYMOI takes into consideration also the market volatility its Ups and Downs can be much steeper compared to normal RSI. Tushar Chande recommended to combine this indicator with any other indicator, that can reveal prevailing trend on the market. DYMOI should be used best in the ranging market. Don't forget that it is a countertrend indicator. Alike the RSI we can use the 70/30 or 50/50 levels but the final decision is up to every trader himself.
If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.