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I think momentum sucks. Another thing wrong with it is that if you
use it for backtesting stocks your results might be meaningless. If
a stock is split the historical value changes after a split - what
was ($30 - $20) becomes ($15 - $10). Better to convert to a
Percent (rate of change) rather than use an absolute dollar value.
Even converting to a slope, as Bob suggests, is inaccurate. The
previous
$10 difference, for example, per month, becomes $5 per month.
Not conducive to good system development.
donc
Subject: Re: Indicator lag
Date: Wed, 14 Oct 1998 11:43:29 -0400
From: Bob Fulks <bfulks@xxxxxxxxxxxx>
To: Trade Jack <trade_jack@xxxxxxxxx>
CC: Omega-list@xxxxxxxxxx, CRLeBeau@xxxxxxx
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.
...
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