Momentum Divergence Momentum (also known as rate of change) is a powerful indicator, albeit one that has not been used very effectively by many traders. The difficulty in using the momentum indicator for timing SSF (as well as stock) trades is in its interpretation. This topic has been discussed extensively in my book Momentum Stock Selection (McGraw-Hill, 2000), in which I outline a number of steps for using momentum as a timing indicator in stocks. The use of momentum in SSFs is a natural extension of its use in stocks. As noted by the heading of this section, momentum can be used to spot momentum divergence, which is simple to find but difficult for some traders to apply because they are not familiar with the correct timing application of momentum divergence. This section shows you how to use momentum divergence for timing SSF trades. Definition The momentum indicator compares the price of a given market today with the price X days ago. If the price today is higher than the price X days ago, then momentum is positive, or bullish. If the price of a market is lower than it was X days ago, then momentum is bearish. All you need to do to calculate momentum is subtract the closing price of a market today from the closing price X days ago if the price today was lower than the price X days ago. As an example, if the price today is 10 and the price X days ago was 20, then momentum for today is -10 (minus 10). If the price X days ago was 10 and the price today is 20, then momentum is +10 (plus 10). The X in this case is 28 periods. For a daily SSF price chart, the momentum would be determined using 28 days. For an hourly SSF chart, momentum would be determined using 28 periods of 60 minutes each. Divergence Divergence occurs when price and momentum are moving in opposite directions. In particular, when price is making a new low for a given period while momentum is moving higher, bullish divergence is occurring. When price is making a new high while momentum is moving lower, bearish divergence is said to be in process. Note that bullish and bearish divergence in and of themselves do not indicate that one should buy or sell. The divergence pattern must develop into a sell signal or a buy signal. Please refer to Figures 11.7 through 11.10 for examples of bullish and bearish divergence. stock broker ~ forex trading strategy |