Re: Indicator lag

[Bob Fulks <bfulks@xxxxxxxxxxxx>]

At 1:36 AM -0400 10/14/98, Trade Jack wrote:

>"In our regular talks with other traders, we have found that more of them
>use momentum than almost any other tool, except perhaps moving averages.
>Momentum isn't always used as their primary study, but the traders monitor
>it closely and use it with other technical studies to arrive at more
>timely trading decisions. Among the many reasons for the popularity of
>momentum are its simplicity, its versatility, and the fact that it is
>considered to be a rare "lead indicator." Rather than merely reacting to
>the direction of prices, momentum can change directions before prices
>change direction. Very few technical studies can provide a trader with
>this valuable lead factor."

>from "Technical Traders Guide To Computer Analysis Of The Futures Market"
>by Charles LeBeau and David W. Lucas, 1992, p. 77.

>could of written the above myself. in fact, i did tonight.


I agree that momentum is a great indicator. But it helps to really
understand when it is a "leading indicator" and when it is a "lagging
indicator". Look at the formula for it:

    Momentum = Price - Price[Length];

So it calculates the amount the price has changed over some number of bars
and thus it is a measure of the slope of a portion of the price curve.

If the price is moving up smoothly the momentum stays at a fixed positive
value and tells you how fast the price is moving up.

If the price increase begins to slow down (as you might find near the end
of an upward move), the momentum (slope of the price curve) will begin to
decrease. So you might consider this as a "leading indicator" of an
impending price change under this condition.

But If the price suddenly switches from moving up to moving down, the
momentum will slowly begin to start down and eventually go negative. In
this case, a noticeable change in momentum might lag the price change by
quite a bit. So in this case, you might call it a "lagging indicator".

I usually normalize the value of the indicator so that it plots the slope
of the price curve in "percent change per year". I find this useful when
comparing the momentum on different investment opportunities and different
price compression charts.

The code I use to do this is attached below. This is a function so it must
be named "Slope" to verify (unless you change the code). (I also use the
function in systems.)

You also need to create an indicator which calls this function:

---------

Input: Price(Close), Offset(5);

Plot1(Slope(Price, Offset), "Slope");
Plot4(0, "Zero");

---------

Bob Fulks

---------

Code for function:

{ *******************************************************************

   Function    : Slope

   Last Edit   : 12/16/97

   Provided By : Bob Fulks

   Description : This function returns the slope of a price signal
      averaged over the past "Offset" bars. It returns the slope
      normalized to the percent change per year. It uses the
      approximation that (Price/Price[1] - 1 is << 1)

 ********************************************************************}

Inputs: Price(NumericSeries), Offset(NumericSimple);

Vars:   Factor(0);

if CurrentBar = 1 then begin
   if DataCompression = 1 then begin
      Value1 = TimeToMinutes(Sess1EndTime) - TimeToMinutes(Sess1StartTime);
      Factor = (253 * Value1) / (BarInterval * Offset);
   end;
   if DataCompression = 2 then Factor =  253 / Offset;
   if DataCompression = 3 then Factor =   52 / Offset;
   if DataCompression = 4 then Factor =   12 / Offset;
end;

if Price[Offset] <> 0 then Value2 = 100 * Factor * Log(Price / Price[Offset]);

Slope = Value2;