I’m going to get pedantic, I seem to be in one of those moods. I’m going to pick on momentum, it doesn’t deserve it, it hasn’t done anything to me, but I feel it is an impostor in the markets, and needs to be outed for what it really is.
Momentum is something that is mentioned in most trading systems/blogs/forums/books. It is part of most charting packages, and has multiple indicators named in it’s honor. However let’s look at the definition of momentum:
momentum [n pl-ta, **-tums] – ** the product of a body’s mass and its velocity. Symbol p See also angular momentum
If we break this down in a trading context, mass, would be volume, velocity would be distance traveled over time. In the spot Forex market there is no way to measure momentum. Spot Forex has no volume measurement, hence no mass, so the calculation fails.
A standard momentum indicator has the following calculation at it’s core:
MOMENTUM = CLOSE(i) / CLOSE(i – N) * 100
That’s not momentum, no mention of the mass of the market or a price movement (volume), just a measurement of the change in closing prices from one period to another period as a percentage. So if it is not momentum, what is it?
I’ll put forward acceleration, again a definition:
acceleration **[***n pl **-ties] – ***the time rate of change of velocity with respect to magnitude or direction; the derivative of velocity with respect to time.
The object in this equation is price, of which the rate of change against time can certainly be quantified on a chart that contains both an x and y axis (price and time). In fact that seems to be what the momentum indicator calculation above is measuring.
I suspect most momentum indicators are really measuring acceleration. So if we are looking at acceleration, not momentum, does that really make a difference? I suspect I am just being narky, but let’s call it for what it is.