Momentum Indicator

Summary of what you'll learn in the feature article below:

• Markets bottom when all the sellers have sold (i.e. selling volume dries up) and markets top out when all the buyers have bought (i.e. buying volume dries up).
   
• The Better Momentum indicator measures these waves of buying and selling volume. It improves on the traditional Momentum indicator which is price-based.
   
• Buy signals are given when price makes a lower low but selling volume makes a higher low – Bullish Divergence. Sell signals are the reverse.
   
• Exhaustion Volume needs to be present to confirm a top or bottom. Two patterns generally occur: Exhaustion Volume first then a series of Divergence patterns or a series of Divergence patterns then Exhaustion Volume.
   
• High probability trades can be found by combining these Bullish and Bearish Divergence signals on the Better Momentum indicator with other non-correlated indicators, such as Cycle turning points and High Volume "Churn".
   
• These Better Momentum signals work in any time frame (tick to monthly charts) and for any market (futures, stocks, forex, etc.).

A Momentum Indicator Identifies When A Market Is Ready To Turn…

Momentum Indicator (Emini 2,097 tick)

“Why do markets turn?” The answer to this question is the secret to trading – the essence of speculating. Here's my best answer:

• Markets bottom when all the sellers have sold (i.e. selling volume dries up)
• Markets top out when all the buyers have bought (i.e. buying volume dries up)

The next logical question then is "How do I know when all the sellers have sold or all the buyers have bought?" And that's where the Better Momentum indicator comes in.

Let’s take the example of an uptrend. The move starts off with an explosion of buying that takes the market past a significant resistance level. In the early part of the move Professionals, large volume traders are active. On any dips the buyers step back in and continue to drive the market higher.

However, as the move progresses, Amateurs, who trade smaller volume, start to join in. Price continues to advance but eventually fewer and fewer buyers, with less and less buying volume, are participating. Professional traders start taking profits on any advances and the buying volume starts to decline.

Eventually, a point is reached when all the buyers have bought. The market tops out and price starts to reverse. Sometimes we move straight into a downtrend. At other times we get a final blow off buying climax – Amateurs desperate to finally get on board. But the trend has changed and it's now time to exit Long positions and Short.

The chart above is a 2,097 tick bar chart of the Emini and highlights two reversals. The bottom was formed when a new low was made but the selling volume (as shown by the Better Momentum indicator) dried up. Similarly, the top was formed when a new high was made but the buying volume dried up. The red and white dots on the indicator and price bars indicate when buying and selling starts declining.

But We Need To Be Measuring Changes In Buying and Selling Volume, Not Price…

Momentum Indicator: Volume versus Price (Emini 699 tick)

The traditional Momentum indicator, which seems to have no inventor, has been around forever. It has done a great job in the past of measuring the decline in Momentum as the uptrend move described earlier loses power. But it has a fatal flaw – it measures the change in price, not buying or selling volume.

In years gone by, the only timely data traders had available was price. Volume data was either not available or was delayed. But times have changed. My data feed not only tells me the volume of every single trade, but whether it took place on the bid or the ask! Extraordinary, really. So let's make an improved Momentum indicator.

The Better Momentum indicator measures these waves of buying and selling volume and tells you when there is Bullish or Bearish Divergence. That is, in a downtrend, price is making new lows but the selling volume is becoming less and less – setting up for a reversal. And vice versa for an uptrend.

The chart above is a 699 tick bar chart of the Emini and shows the Better Momentum indicator (volume based) along side the traditional Momentum indicator (price based) with the same settings. As you can see for the highlighted turning point, the Better Momentum indicator correctly identified fewer sellers participating in the move and a likely reversal. The traditional Momentum indicator totally missed that a turning point was being formed.

Watch for These 2 Momentum Indicator Patterns at Turning Points…

Momentum Indicator Reversal Patterns (Emini 699 tick)

The chart above illustrates the two different market reversal patterns:

• Exhaustion volume followed by a series of Divergence patterns
• A series of Divergence patterns followed by Exhaustion volume

In the first case, the Better Momentum indicator appears to be making a rounding pattern. There might be several Divergence signals and knowing which one to pick can be tricky. However, seeing that a reversal is approaching is the important point. Personally, I find the Divergence signals that happen close to the zero line on the Better Momentum indicator are the best.

In the second case, a series of Divergence signals is then followed by a sell-off or blow-off exhaustion volume. These Momentum indicator spikes mark the turning point and change in trend. Entering at these extremes is psychologically tough – but helped with confirmation from other non-correlated indicators.

Note: The divergence algorithm used by the Better Momentum indicator is quite sophisticated. It doesn't just look for the current peak to be less than the previous peak. But instead compares the current peak with a statistically significant prior peak.

There is a slight delay in the printing of Divergence signals as a peak has to be confirmed. However, this delay is not usually a problem for trading because the Divergence signals lead the market.

And Confirm Momentum Indicator Signals with Non-Correlated Indicators…

Momentum Indicator with Better Sine Wave & Better Volume (Emini 699 tick)

The best way to use the Better Momentum indicator is with confirming, non-correlated indicators. Since the Better Momentum indicator is measuring waves of buying and selling, I use price cycles and average trade size as my confirming indicators. High probability trades set up when you get all 3 signals lining up.

For example, the Short trade shown in the Emini 699 tick bar chart above had:

1. Bearish Divergence on Better Momentum with higher prices but less buying volume
2. Cyclical turning point on the Better Sine Wave indicator
3. Low Volume up bars on the Better Volume indicator showing Amateurs are buying

The Long trade shown in the chart above had:

1. Bullish Divergence on Better Momentum with lower prices but less selling volume
2. Cyclical turning point on the Better Sine Wave indicator
3. High Volume Churn on the Better Volume indicator showing Professional buying

The last trick to identifying high probability trades is using these 3 non-correlated tools (Better Momentum, Better Sine Wave and Better Volume) on multiple time frames.

Bonus Indicator 1: Divergence Signals for Other Oscillators

Momentum Indicator: Divergence Signals with RSI (Emini daily)

The Better Momentum indicator package includes 2 bonus indicators.

The first bonus indicator uses the Better Momentum divergence algorithm to calculate bullish and bearish divergence signals for any oscillator you choose. All you do is input the oscillator function and zero setting into the indicator inputs.

An example using the popular RSI oscillator is shown in the chart above (labeled "_Better Momentum Any").

Bonus Indicator 2: Better Momentum Indicator for Weekly Charts

Better Momentum Indicator for Weekly Charts (Emini weekly)

The second bonus indicator is a version of Better Momentum for weekly charts ("_Better Mom Wk" in the chart above).

One of the strengths of the Better Momentum indicator is that it uses bid/ask volume to calculate true buying and selling. However, in TradeStation this bid/ask data is not available on weekly charts. Under normal circumstances the indicator defaults to making a calculation based on the Open/High/Low/Close and Volume. But we can do better than this.

The chart above illustrates why this is worth doing when looking at weekly charts – with 3 additional signals at key turning points.

What People Are Saying About The Better Momentum Indicator

The Better Momentum Indicator

The Better Momentum indicator shown in the videos and charts above is now available for sale and immediate download. Here’s what you get:

• Better Momentum Indicators for TradeStation, MultiCharts or NinjaTrader
• 9 High Definition Video Tutorials (93 min) with everything you need to know
• 52-page Trading Manual with annotated charts to accompany the video tutorials
• The indicators work on all charts – Eminis, Forex, Stocks & Commodities
• All the indicators have alerts so you can be warned when new Exhaustion, Flush, bullish & bearish Divergence signals occur
• EasyLanguage Function to program your own systems & indicators
• Locked code

The 9 Better Momentum high definition online video tutorials – total 93 minutes – cover the following topics:

• Installation instructions (9 minutes)
• Why & how markets turn (9 minutes)
• Divergence signals & entries (8 minutes)
• Volume momentum is better than price momentum (4 minutes)
• Settings for trading Eminis, Stocks, Futures, Indices & Forex (12 minutes)
• Trading with multiple time frame confirmation (9 minutes)
• Trading with price cycles & volume pattern confirmation (28 minutes)
• Bonus indicators (10 minutes)
• Summary of Better Momentum indicator key points (4 minutes)

Better Momentum FAQs    More Screenshots