What it means
The IMI was developed by Tushar Chande and combines ideas from candlestick charts and the relative strength index. A candlestick shows the open and close for each day, and the IMI uses the gap between them to see who won each day's contest.
Bigger gaps carry more weight than small ones. On a day when the share closes above its opening price, the difference counts as a gain.
On a day when it closes below its opening price, the difference counts as a loss, and the indicator then compares total gains with total losses over the chosen period. The usual period is 14 days.
The result is the gains as a percentage of all price movement from open to close, so a reading of 50 means gains and losses were equal and a reading above 50 means buyers have been stronger. Many analysts treat readings above 70 as overbought, meaning the share may have risen too far too fast, and readings below 30 as oversold.
These thresholds are rules of thumb, not laws, and the share price can remain above 70 for long periods in a strong trend. Using them without regard to the trend is a common cause of early exits.
Unlike the relative strength index, which uses closing prices from one day to the next, the IMI looks inside each day. That means it captures the day's own battle between buyers and sellers, including when a share gaps up or down at the open and then trades the other way.
The nuance is that the indicator is only as good as the context in which it is used. A single reading is less informative than a pattern, and users usually combine it with trend lines, volume and fundamentals, and test any rule on past data before putting money behind it.
In practice
Real-world examples.
Example
A trader reviews a technology share and sees an IMI of 78 after a strong two-week climb. She treats it as a warning that the move may be stretched. She delays buying and waits for a smaller price pullback, and she writes down the price level at which she would reconsider.
Example
An analyst finds a share with an IMI of 22 after a sharp sell-off. She checks the company's results and finds no bad news. She considers the share a candidate for a rebound and sets a limit on her possible loss, so a further fall would cost her no more than a small, planned amount.
Example
A fund compares the IMI with the relative strength index for the same share. When both signal overbought conditions, it takes more notice. When they disagree, it waits for further evidence. The analysts log each case so they can review the results at year-end.
Formula
Calculation
IMI = 100 x (Sum of gains) / (Sum of gains + Sum of losses), over 14 days
Gain on an up day = Close - Open. Loss on a down day = Open - Close.
Suppose that over 14 days a share has total gains of $12.00 on its up days and total losses of $8.00 on its down days. The total movement is 12.00 + 8.00 = $20.00. The IMI is 100 x 12.00 / 20.00 = 60. A reading of 60 suggests buyers have been somewhat stronger, but it is well below the 70 level that analysts often treat as overbought.Case study
Seen in the real world.
This is an illustrative story about a fictional trader, Marcus, who followed a chemicals company called Veridian Materials. Its shares had risen for nine sessions in a row, and the IMI reached 82.
Marcus had bought earlier and was tempted to hold for more. Remembering that readings above 70 often come before a pause, he sold half his position and placed a stop-loss order on the remainder.
The share drifted lower for several days, and the IMI fell back towards 50. This is an illustrative case, and in other circumstances a high reading could have been followed by further gains, which is why Marcus used partial selling instead of selling everything. He recorded the trade in his journal along with the reading, so that he could review how the indicator behaved over time.
Watch out
Common mistakes.
- Treating 70 and 30 as automatic sell and buy signals. In strong trends, a share can stay overbought or oversold for a long time.
- Confusing the IMI with the relative strength index. The IMI uses open and close within each day, while the relative strength index uses closes from day to day.
- Using the indicator without testing it. Rules should be checked against past data and different market conditions, because a rule that worked in one period may fail in another.
Questions
People also ask.
Who developed the IMI?
It was developed by Tushar Chande.
What period is used?
Fourteen days is the common setting, though traders can change it to suit their style, with shorter periods giving faster but noisier signals.
What does a reading of 50 mean?
It means gains and losses inside the trading days have balanced out, so neither buyers nor sellers have had the upper hand.
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