RMI (Relative Momentum Index) is an oscillator first introduced by Roger Altman in 1993. As its name suggests, RMI excels at analyzing relative momentum changes in the markets, a tool that I frequently employ in my analyses.
Derived from the well-known indicator RSI (Relative Strength Index), RMI utilizes a similar calculation methodology. However, a key distinction lies in its use of exponential smoothing when calculating the “RS” (Relative Strength), setting it apart from RSI.
The Best Way to Utilize RMI as an Indicator
RMI can be utilized in various styles similar to RSI. The primary approach often involves identifying “overbought” and “oversold” conditions above and below the thresholds of “70” and “30”. However, based on my experience, this simplistic interpretation may not always be effective. During trends, RMI can extend far beyond these zones, rendering the traditional overbought/oversold approach inadequate. Instead, it is better suited for capturing momentum, as implied by its name.
RMI typically captures the momentum of trends, particularly counter-trends within longer timeframe horizontal movements. When paired with its own moving average, preferably an exponential moving average to closely track the original index, it can generate reliable “buy” and “sell” signals. The standard period for RMI is often set at 14, mirroring that of RSI, along with the signal exponential moving average. The most opportune times to utilize RMI are within longer timeframe horizontal movements for identifying counter-trends within flat zones, and within longer timeframe trend channels to capitalize on upswings or downswings.
An illustrative example is provided using EURUSD’s 2023 data on a daily timeframe. Given the predominantly horizontal movement, RMI was well-suited for analysis. A sell signal is triggered when RMI crosses below its signal moving average from above or in close proximity to 70, while a buy signal occurs when RMI crosses above its signal moving average from below or near 30. Crosses between 30 and 70 typically do not yield reliable signals.
Weak Points of RMI
While RMI serves as a valuable tool for capturing the momentum of the prevailing trend, like all indicators, it has its limitations. Two notable weaknesses are particularly significant. Firstly, RMI is a smoothed indicator, thus, it may lag behind during sharp price changes, resulting in delayed signals. Secondly, during shifts in longer timeframe outlooks, RMI might generate numerous false signals, especially during the transition from a long-term trend or the conclusion of a flat movement. During trend changes, RMI may continue to anticipate new swings within the trend that fail to materialize.
RMI, as a momentum indicator, holds potential as a tool, particularly for swing traders. It is most effective within longer “up”, “down”, or “flat” trends, offering valuable entry signals or insights into potential shorter timeframe trend changes. However, caution should be exercised during the transition of long-term trends, as RMI may produce false signals. Combining RMI with trendlines and chart patterns can enhance its efficacy for traders.
