Intraday Momentum Index

Key Highlights

• Utilising candlestick charting and relative strength indexing (RSI), the Intraday Momentum Index (IMI) creates trading signals.
  

• Instead of focusing on how the opening and closing prices change from day-to-day, the IMI examines the relationship between a security's opening and closing prices during the day.
  

• Experts use the IMI to identify when a security is overbought or oversold.
  

What Is the Intraday Momentum Index (IMI)?

The Intraday Momentum Index (IMI) is a technical analysis indicator that combines the features of the Relative Strength Index (RSI) with candlestick analysis to evaluate intraday price momentum. Developed by Tushar Chande, it helps traders identify overbought and oversold market conditions within the same trading day.

The IMI compares the sum of gains on up days with the sum of losses on down days, based on candlestick opening and closing prices. Its values range from 0 to 100. An IMI reading above 70 generally signals an overbought market, while a reading below 30 indicates oversold conditions, guiding potential entry and exit points. Unlike RSI, which uses only closing prices, the IMI relies on intraday candlestick data, making it particularly effective for short-term traders.

Understanding the Intraday Momentum Index

The IMI meaning refers to the Intraday Momentum Index, is a technical analysis tool that blends elements of both candlestick analysis and the Relative Strength Index (RSI). It is particularly useful for traders who focus on intraday movements and want to identify potential overbought or oversold conditions within a single trading session.

The IMI works by comparing a stock’s upward price movements with its downward movements during the day. The indicator looks at whether prices close higher or lower compared to their opening value and then measures the strength of these moves over a set number of days, usually 14 days. Traders often use this approach as part of an Intraday Momentum Index Strategy to identify potential overbought and oversold conditions and make informed entry or exit decisions.

When more days show strong upward closes compared to downward closes, the IMI value rises, signalling bullish momentum. Conversely, when more sessions close lower, the IMI falls, signalling bearish momentum.

Traders interpret the IMI using threshold levels. A reading above 70 is generally considered overbought, suggesting that the asset may be due for a pullback. A reading below 30 is considered oversold, indicating the possibility of a price rebound. However, rather than using these levels in isolation, traders often combine IMI with other indicators or chart patterns to confirm signals.

The Intraday Momentum Index Formula

The formula for IMI is:

IMI = (Sum of Absolute Deviations / 2) × 100

Here, the sum of absolute deviations refers to the total imbalance between two distributions, often applied in fields like demography, trade, or migration studies. Dividing by two ensures that double counting of deviations is avoided, while multiplying by 100 converts the value into a percentage, making it easier to interpret. An IMI value of 0 indicates perfect balance, whereas a value closer to 100 shows maximum imbalance. The simpler version of the formula is:

IMI = (Sum of Up Closes ÷ (Sum of Up Closes + Sum of Down Closes)) × 100

Example Using the Intraday Momentum Index A trader analysing the stock of ABC Ltd notices that the price has been fluctuating between ₹490 and ₹510 over several sessions. To identify potential entry and exit points, the trader calculates the Intraday Momentum Index (IMI) over a 14-period time frame. The IMI is derived by comparing the sum of gains on up days to the sum of losses on down days, expressed as a ratio. Suppose over the 14 days, the stock recorded intraday gains totalling ₹56 and intraday losses of ₹44. The IMI is calculated using the formula:

IMI = (Sum of Up Closes ÷ (Sum of Up Closes + Sum of Down Closes)) × 100

Plugging in the values:

IMI = (56 ÷ (56 + 44)) × 100 = (56 ÷ 100) × 100 = 56.

An IMI reading of 56 suggests that the stock is in a neutral zone, as it lies between the commonly used thresholds of 30 and 70. The trader continues to monitor the index. A week later, intraday gains rise significantly, lifting the IMI to 74. This reading indicates overbought conditions, signalling that the stock may face selling pressure soon.

Components of Intraday Momentum Index

The components of the Intraday Momentum Index indicator are mentioned below:

Price Changes

1. Very high and very low prices: The highest and lowest prices of the security on a trading day are considered in the IMI calculation. These values represent the maximum and minimum prices at which the security has been traded within a specific period.

2. Opening and Closing Prices: The IMI uses prices at the close and open markets for security to gauge overall price fluctuations during the trading day. The close price denotes the security's final trading price for the day, whereas the open price denotes the first exchanged price once the market opens.

Trading Volume

1. Relationship with Price Changes: The IMI's most important factor is trading volume, which shows the level of interest and trading activity in a given security. There is frequently a significant degree of market belief behind price movements when there is a substantial link between price changes and trade volume.

2. Significance in the IMI calculation: This indicator provides a more accurate representation of the market momentum by including trading volumes in its IMI calculation. The IMI can filter any potentially misleading signals as a result of low trading activity or market anomalies by taking into account both price and volume data.

Calculations and procedures for the Intraday Momentum Index

The following formula is used to calculate the IMI.

IMI = gains / gains + losses ✖ 100

Where gains are the sum of positive price changes multiplied by their respective trading volumes, losses are the sum of negative price changes multiplied by their respective trading volumes.

The process of calculating the Intraday Momentum Index

1. Identifying Data Inputs: First, traders will need to obtain the data inputs that are required for IMI calculations, namely high, low, open and closed prices and the trading volume of the security concerned.

2. Computing Price Differences: By subtracting the open price from the high price and the low price from the open price, traders must calculate the price difference. For the calculation of the IMI, this step provides the necessary data on gains and losses.

3. Calculating IMI Values: Finally, traders are required to calculate the IMI by dividing the amount of gains by the total of losses and multiplying the result by 100. The resulting values generally range from zero to 100, with higher values indicating stronger upward momentum and lower values suggesting downward momentum.

Strategies using the Intraday Momentum Index

The strategies that use the intraday momentum index are as follows.

Trend Identification

1. Bullish and Bearish trends The IMI can assist traders in identifying bullish and bearish trends. If the IMI is above 50 and rising, it can be interpreted as a bullish signal, while an IMI below 50 and falling may constitute a bearish signal.

2. The strength and duration of trends Traders will be able to assess the strength and duration of identified trends by looking at the relative position and movement of the IMI. A strong and sustained trend can be confirmed by an increasing or declining IMI, in addition to its continuing presence in these areas.

Trade Entry and Exit signals

1. Crossover Method Using the IMI, crossovers are a popular trading approach. A cross below 30 may indicate a purchase indication, while a cross above 70 may indicate a sell signal.

2. Divergence Method Trading on differences between the IMI and price is another tactic. A buy signal may be given by the IMI increasing while the price is decreasing, while a sell signal may be given by the IMI declining while the price is rising.

Limitations of Intraday Momentum Index

The drawbacks of the intraday momentum index are mentioned below.

1. False Sounds and Signals: Like most indicators, the IMI may provide unreliable signals, particularly in choppy and sideways markets. To improve its accuracy and reliability, the IMI should be used by traders in conjunction with other analysis tools and strategies.

2. The Dependence on Historical Data: Historical price and volume data are relied on a lot by the IMI. This data is potentially useful for understanding past market behaviour, and it may not always be accurate in predicting future trends.

3. The Effects of Market Volatility and Additional External Factors: Various outside factors, for example, market turbulence, news from the economy, and changes in investor sentiment can influence the IMI. These factors should be taken into account by market participants, and their strategies should be adapted accordingly.

Conclusion

Day traders use the intraday momentum trading tool as a valuable technical analysis indicator to measure momentum within a single trading day. It identifies possible entry points and exits in complex markets through a combination of price and volume data. Changes in prices, high and low prices, closing and open prices, as well as the volume of transactions, shall be considered by the IMI calculation. Traders interpret the IMI values to identify overbought and oversold levels, divergences and prevailing market trends. In simple terms, what is Intraday Momentum Index? It is a tool that helps traders analyse short-term momentum and make faster, more informed trading decisions.