By definition, The Dynamic momentum index is an indicator used in technical analysis that determines overbought and oversold conditions of a particular asset. This indicator is very similar to the relative strength index (RSI). The main difference between the two is that the RSI uses a fixed number of time periods (usually 14), while the dynamic momentum index uses different time periods as volatility changes.
The Dynamic Momentum Index (DMI) was developed by Tushar Chande and Stanley Kroll. DMI is very similar to Welles Wilder’s Relative Strength Index (RSI). However, there is one basic but an important difference. Unlike the RSI which uses a fixed number of periods, the Dynamic Momentum Index uses a variable amount of periods as market volatility changes. The number of periods the DMI uses decreases as market volatility increases thereby allowing the indicator to be more responsive to price changes. The Dynamic Momentum Index can be interpreted in much the same way was as the more traditional RSI as an overbought and oversold indicator. Readings above 70 are considered to be overbought while readings under 30 are considered to be oversold.
Every aspect required to calculate this indicator has been simplified to allow the user full customization of this indicator. This includes the price, standard deviation periods, MA of standard deviation periods, MA of statndard deviation type, the DMI periods as well as the upper and lower bounds for the DMI periods that determines the range the dynamic periods can fluxuate between.
The DMI indicator has 2 basic indicator plots available. The default display is the Dynamic Momentum Index indicator itself. The secondary display plot is the dynamic periods. This allows the user to have a knowledge about what periods length is being used for any given bar loaded in the chart.