Momentum principles

If you have ever used an oscillator for your price movement assessment, you have dealt with representations of market momentum in one form or another.

Since self-directed traders get bombarded with choices, we want to point out a few core principles about momentum and its representation tools in this brief text.

Some of the more well-known oscillators are:

CCI commodity channel index

RSI relative strength index

ROC rate of change

MACD moving average convergence/divergence

One advantage of looking at the market through the looking glass of momentum is that momentum can be leading to price (directional change), giving you a heads up.

It is essential to be aware of two classes of momentum indicators regarding the difference in their inherent formulas, which divides them into oscillators with set ranges (defining their extremes with set values) and oscillators with open-ended values for their extremes.

The set range oscillator has the advantage of "ease of use," while the open-ended version describes the actual momentum more precisely.

Precision is handy when defining if the print is the beginning of a new trend; hence, it shouldn't be faded or a blow of top, indicating a trend reversal.

It typically also prints the more "good looking" divergences from a beauty principle perspective, which helps to identify the likelihood of the end of a directional move.

Another noteworthy principle is that the higher the time frame, the more significant momentum-based divergence readings are.

In other words, momentum interpretations in alignment with time cycles can provide the astute trader with a leading edge but require skillful interpretations with a typically more elaborate rule set than some of the more standard indicators.

Example:

this chart shows a successful entry signal generation based on momentum observation full filling multiple requisite to have a high hit rate with a low entry risk:

significant time frame = weekly

location: after an extended move

time: wide double bottom

extended overbought readings

price to indicator divergence as a result you end up with appropriate risk reward ratios:

in comparison you will find countless momentum based signals that fail if you leave a filter sequence like the one above mentioned out.

In fact the first prime reading after a price sideways range provides for a good continuation signal instead

it is essential for all indicator/oscillator supported trading to be aware that trading isn't black and white

the human mind wishes it to be so but reality is that signal generating trading should find itself filtered in at least three scenario main sub categories,

otherwise a losing system can be expected