Technical Q: Strength, Velocity, Speed: "really" different from Momentum?
Hi all, this may start a technical debate but i hope the thread at the end will be a useful reference to others later..
i spend a lot of time creating chart setups that can reveal to me the price action and help me predict where the price will go next (ok, we all do that), then take that setup if i like it and pack it into a custom indicator that can trigger signals, alerts.. basically interprest a complicated/crowded charts and lines, MA's, channels...etc into a simpler visual that can support a trade decision.. green go long, red go short kind of thing, so...
noticed many of these indicators end up providing more or less the same curve & very similar signals (if we're considering only price action, so trend & momentum - not volume, and not "price levels", like pivots, OR, S/R..etc).
the curve may be different depending on the type of MA, the periods, smoothing.. etc.. but they will still overall be the same...and i end up throwing away many of these custom indicators.. and the kings of all are really Trend and Momentum ones.. Trend is the angle/slope of the move of the price during period x, and momentum is expressed by how far a price point is (or a fast MA) from a slower MA (like the rise of a slope) during that x period..
here comes the question to fellow technical traders .. there are other discussions around strength, speed, velocity indicators.. i see momentum (using the above definition) as a proxy for all these.. and no material difference or "new insight" that these metrics provide from momentum. Am I wrong?
cause if i am, i will definitely want to capture these as well to support my price move analysis (and hence a trade decision finally = increases profitability %).. yes, they may come handy when comparing price action of 2 or more symbols side-by-side (who is moving fatser, kind of), but then again, wouldn't comparing the momentum delivers the same "insight"
if i'm correct, then i should focus on analyzing a stock/future chart *only* in 3 areas, and that's all i need for a reliable trading system .. and i should only be using 1 indicator in each of these areas with no confusing "similars" .. preferrably the most basic that gives best insight:
- Price Moves: Trend & Momentum (represnts slope and strength of a move)
- volume (against price) (represents underlying "buzz" & supply/demand)
- important Price levels & ranges (incl S/R, Pivot levels, ATR...) (help identify bounces, entries & exits..etc)
and i can comfrotably throw away everything else (basically 100's of studies that are out there in all platform)..
Trend is an expression used to describe positive autocorrelation. It is not clearly defined. Momentum is a clealy defined concept, which relies on the change of price over a selected period (the equivalent for a continuous function would be the 1st derivative of price)
A trend and a momentum indicator alone cannot be used to describe price action. Price action has components that are cyclical, there is auto-correlation which is positive when a move starts but can become negative when a move ends. The momentum indicator also has some properties, which are not useful, as the impact of the data that drops out of the calculation on the far end.
It is true that many indicators use similar concepts, particulary if their values are only depending on the price series of a single instrument. One oscillator, whether momentum, RSI, Stochastics or MACD is certainly enough for trading, as multitude of them produces conflicting signals which would be more difficult to exploit. But there is other information that can be exploited: Volume, open interest, bid & ask traded volume, market breadth, data from correlated instruments, time of day, day of week, etc.
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i respectfully disagree on the above definition of trend.. allow me to use trend here to refer to the angle of slope for the line connecting to distant price points.. when it's positive, the trend is up and vice-versa.. the common notion of trend..
still interested in your view.. i'm trying to "fishbone" the work on price studies.. let's leave volume, and market-related insight aside, which i totally agree provide immense insight.
but let's assume as a first step, we look only at a chart of price bars (also being specific that this is the standard price vs time chart, and not other variations like range/tick..etc).. the basic inputs i have for a single price data point is Open, Low, High, Close .. then comes immediate derivatives from this basic level like range, HL/2, HLC/3 ..
we then start looking at a series of these data points (adding time as a dimension), and we can get another level insight like trend and momentum .. Trend & momentum being (roughly) as explained above
my question is, how would velocity, speed, or strength be significantly different from momentum.. is momentum the father of all these 3, and they add no new insight.. it seems to me these 3 “measures” are correlated with Momentum. (I like the example of tossing the ball to someone.. you toss it at an angle and with a certain force, and these 2 (angle + force) determine everything else, the speed, the curve it takes, etc etc.. given there’s no “winds” or walls to resist it )
if we make that conclusion, then we can move to focus on getting that new insight from "somewhere else" - we start with the winds and walls .. the only area we left behind on this price chart .. the common price levels: S/R , pivots where we can employ theories like Fib & MM, beyond that, we need to further expand into considering the volume, Bid/Ask , Open Interest, and the wider market metrics.. and others. is this a sound line of thinking?
Angles and slopes cannot be used to define a trend for several reasons. First, an angle depends on the horizontal and vertical scale of you charts. Both scaled can be compressed, which changes the angle although price does not change. Second, the angle depends on the lookback period used.
The classical definition for an uptrend is a series of higher lows and higher highs. To check for a trend the defitinion of a swing high and swing low of strength N is required.
Swing high of strength N: A group of 2*N+1 price bars with the high of the middle bar being
- higher or equal than the highs of the N bars to its left
- higher than the highs of the N bars to its right
Swing low of stregth N: A group of 2*N+1 price bars with the low of the middle bar being
- lower or equal than the lows of the N bars to its left
- lower than the lows of the N bars to its rigth
Now that we have defined the swing highs and swing lows, we can define what a trend is.
Uptrend: A series of higher lows and higher highs. An uptrend thus requires at least one higher swing low of strength N followed by a price bar with a high that exceeds the prior swing high. Although this price bar is not necessarily the next swing high, it guarantees that the next swing high will be higher than the previous one, and thus establishes the new uptrend.
Downtrend: A series of loweer highs and lowerer lows. A downtrend thus requires at least one lower swing high of strength N followed by a price bar with a low that falls below the prior swing low. Although this price bar is not necessarily the next swing low, it guarantees that the next swing low will be lower than the previous one, and thus establishes the new downtrend.
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Super.. thanks for the detailed clarification.. i love that..
now once a trend is formed as above, how is the speed, strength or velocity of that trend significantly different from the momentum of the trend.. momentum being expressed as a mathematical expression of the relative distance of the price point (or a relatively faster MA of price) to a slower MA.
in your view, do they provide any specific insight we don't get once we have calculated the momentum ?
Fattails, please.. i wouldn't dare confuse momentum with MACD
wikipeida's in all it's simplicity :
sorry if used my own longer definition, as to measure the rate of change we need a "reference", and most studies (SMI, Momentum, KST..etc) use a slower MA for that .. hope I didn't cause any confusion to anyone..
the questions remains .. anyone has different openions on sterngth, speed and velocity.
kind reminder, the end desired result of my Q is to discover a valuable element I/we can add to our trading tools, that is not a repeat of something we already have, or to get rid of something we really don't need to keep on a chart, and enable better focus. all inputs appreciated,