SMI Ergodic Oscillator

Description

The SMI Ergodic Oscillator (SMIEO) is a technical analysis tool that helps traders and investors identify potential trends and reversals in financial markets. It is based on the SMI Ergodic Indicator, which in turn, is a refinement of the True Strength Index (TSI) developed by William Blau.

Input Parameters

Fast: A moving average that reacts quickly to recent price changes, commonly used for short-term trend analysis.
Slow: A moving average that responds more slowly to price fluctuations, useful for identifying longer-term trends.
Signal: The signal line is a 9-day EMA for this indicator. As a moving average of the indicator, it trails the SMI Ergodic and makes it easier to spot SMI Ergodic turns.
Oversold: Refers to a condition where an asset's current price is significantly lower than its historical prices over a defined period, indicating potential exhaustion of selling pressure and a likelihood of price rebound.
Overbought: Refers to a condition where an asset's current price is significantly higher than its historical prices over a defined period, suggesting potential exhaustion of buying momentum and a likelihood of price correction.
Price Source: The specific data points (such as open, high, low, or close) from each candle in a financial chart that an indicator uses for mathematical computations, enabling the calculation of metrics like the average over a specified period.

Use Case:

Overbought/Oversold: When the SMI Ergodic Oscillator reaches extreme values, it may indicate overbought or oversold conditions. Overbought conditions occur when the oscillator reaches high positive values, suggesting that the price is potentially overextended and may reverse. On the other hand, oversold conditions happen when the oscillator reaches low negative values, indicating that the price may be undervalued and could rebound. However, it is essential to note that these extreme values should be used with other technical analysis tools, as they may not always signify immediate reversals.
Another critical aspect of interpreting the SMI Ergodic Oscillator is recognizing divergences and convergences between the oscillator and the price. A bullish divergence occurs when the price forms lower lows while the oscillator forms higher lows, suggesting a potential trend reversal to the upside. Conversely, a bearish divergence happens when the price forms higher highs, but the oscillator forms lower highs, indicating a possible trend reversal to the downside.

This feature can be used in: