What is MMI Index and its Benefits for Traders in Stock Markets?

While evaluating a stock, alongside examining its charts and fundamentals, investors' behaviour also requires analysis. One of the powerful tools that reflect market sentiment and investor mood is the MMI Index or the Market Mood Index. The index helps investors and traders make informed decisions based on whether the market is ruled by greed, fear or absolute stability. In this video, we will discuss what MMI Index is and how it works along with the ways traders can incorporate it into their strategies.

What is MMI Index?

MMI Index or its full form Market Mood Index is a sentiment indicator reflecting the emotional state of the stock market, signifying if the market participants are greedy, fearful or neutral. It oscillates on a scale of 0-100.

• 0 to 30 - Extremely fearful
• 30 to 50 - Fearful
• 50 to 70 - Greed
• 70 to 100 - Extremely Greedy

With the increase in the index value, traders can know Eagle Eye’s consolidative market condition which may help regulate volatility in the short term prices.

Who is the Creator of the MMI Index?

Samco Securities, one of India’s prominent brokerage houses, is responsible for setting up the MMI index. They aimed at creating an index which captures market sentiment with a simple graphical representation.

What Does the MMI Index Take into Consideration?

To calculate the MMI some of the market’s volatility metrics, traders’ activities, and behaviour patterns are captured, including the following:

• Volatility Index (VIX) – Measures fear in the market.
• FII and DII Activity – Trends of buying and selling by foreign and domestic institutional investors.
• Market Breadth – Advancing stocks to declining stocks ratio.
• Price Strength – Movement of stocks relative to the indexes.
• Momentum – The acceleration of prices.
• Volume and Delivery Data – Shows the intensity of the buying/selling with pressure.

Each of these indicators is assigned a certain weight and computed jointly will show the current sentiment of the market.

Application of the MMI Index By Traders

Definition of Entry and Exit Strategies

The MMI's extreme levels of fear signify the undervaluation of assets which provides a favourable opportunity to enter the market, while extreme levels of greed may indicate overbought assets requiring a correction. Thus a trader must be very cautious.

Avoid Trade Based on Psychosocial Instability

Traders can use the MMI to be more objective. For example, should the market be rallying and the MMI indicates extreme greed, an MMI disciplined trader would not follow the price and wait for a better opportunity instead.

Use MMI as A Confirmation of Sentiment Filters

Traders can make use of MMI together with other technical indicators like RSI, MACD, or even chart patterns to confirm signals. Success is assured if both the technicals and MMI are in sync.

Assist In The Rebalancing of An Investor's Portfolio

MMI can assist in setting the right moments to realise profit or to purchase more shares for the investor. For instance, when MMI exhibits high greed levels and the portfolio has performed well, it might be a good to unwind some of the positions and rebalance.

Concluding Remarks

The Market Mood Index (MMI) is a reliable measurement of market emotion as it is simple to derive. Be it day trading, swing trading, or long-term investing, the MMI will assist you in avoiding reckless actions and making better decisions regarding trading times. Do not forget that sentiment greatly impacts the direction of price, and the MMI index places you right where you need to be to witness that sentiment.