Custom Search

Momentum (MOM)/Rate of Change (ROC)

These indicators are actually one and the same in the final analysis. Although they are derived using different mathematical operations, their output is the same in terms of highs, lows, and trends. I believe that both momentum and ROC have been ignored and underrated as trading indicators and as valid inputs for trading systems.

The Good News. These indicators are very adaptable. They can be used not only as indicators, but they can also be developed into specific trading systems with risk management. They can also be used for the purpose of timing intraday spread entry and exit.

The Bad News. They are lagging indicators to a given extent. As a result, they tend to be a little late at tops and bottoms.

Solutions. Momentum and rate of change indicators can be plotted against their own moving averages in order to reduce the time lag of signals. Another way of improving the signals is to require that the oscillator remain above its zero line for at least two or three time units before taking action. The signals shown in Figures 2-11 through 2-14 have been filtered for this requirement. As you can see, it eliminates whipsaw-type signals. Figure 2-15 shows an intraday spread using momentum and its moving average to generate signals.