Momentum

 Indicators  
•  Velocity  or  Rate  of  Change  of  Price  Indicators
•  Also  Rate  of  Change  in  Velocity
– Accelera4on  Indicators  
– Second  Deriva4ve  Indicators  
•  Tends  to  Lead  Reversals
– Some  Reversals  Small  
– Others  Change  in  Trend  
 Popular  Momentum  Indicators  
•  Changes  in  Closes
– The  Stochas4c
– The  Rela4ve  Strength  Index,  or  RSI
•  Oscillator  Based
– Simple  Oscillators  
– Moving  Average  Convergence  Divergence  (MACD)  
– Ul4mate  Oscillator  
– Kase  PeakOscillator,  KasePO,  or  KPO  
– KaseCD,  or  KCD  (Kase  Convergence  Divergence)  

Role  of  Momentum  in  Trading  

•  Crossovers  Used  for  Entries
•  As  Candles4ck  Filter  in  Same  Time  Frame
•  Iden4fy  Turns
– Overbought  or  Oversold  (OBOS)  Condi4ons  
– Momentum  Divergence
•  As  Trend  Indicator  Entry  Filter
– Same  Bar  Length  
– Higher  Bar  Length  

The  Stochas4c
Closes  Should  Be  in  Trend  Direc4on;  Measures  Close  
Rela4ve  to  Price  Range  over  N  Bars,  with  Smoothing  

Range  
over  N  
Bars  

•  RN  =  max(H,N)  –  min(L,N)  
•  %K  =  100*{[C  –  min(L,N)]/RN}
•  %D  (SlowK  or  %Ks)  =  X  Period  Average  of  %K,  Usually  3  (Also  Called  “Smoothing”)  
•  %Dslow  (SlowD  or  %Ds)  =  Y  Period  Average  of  %D,  Usually  3
 Overbought/Oversold  (OBOS)  
Usually  Applies  Only  to  Momentum  Indicators  Scaled  to  
Standard  Minimum  and  Maximum  Values,  Such  as  0  to  100  

Typically  above  70  to  90    Overbought     75  

Typically  below  10  to  30  Oversold   25  

Stochas4c  Crossover  Entries  

UNH  Daily—34(5)  
(Exit  Short)  Long  =  %K  Cross  above  %D  
(Exit  Long)  Short  =  %K  Cross  below  %D  
Exit  L,  S  
Exit  L,  S  

Exit  S,  L  
Exit  S,  L  
L   Overbought  
%D   %K  
Whipsaw  

Oversold  

Slow  Stochas4c  Periodicity,  Crossovers  

UNH  Daily—10(3)  vs.  34(5)    

Exit  L,  S   Exit  L,  S  

Whipsaw   Exit  S,  L   Exit  S,  L  

L  
Unstable  and  
Mul4ple  Whipsaws  
Overbought  

Unstable  Rising  from  Oversold  

Whipsaw  
 Stochas4c  Overbought  
CADUSD  Daily  

When  %K  >  X  Usually  70  to  90,  75  on  Chart  =  Overbought  

If  Highly  Overbought  
Ignore  Crossovers  

Pay  Aien4on  to  Drop  

out  of  Overbought  

Stochas4c  Oversold  
GM  Weekly

When  %K  <  X  Usually  10  to  30,  25  on  Chart  =  Oversold  

%K   %D   Only  %K  
Drops  Out  

Both  Drop  
If  Highly  Oversold  Ignore  Crossovers  
Pay  Aien4on  to  
Rise  out  of  Oversold  

Using  OBOS  to  Filter  Candles4cks  

TSLA  Daily—10(3)  
Look  for  Bearish  Candles  When  %K  >  75  (Overbought)  
Look  for  Bullish  Candles  When  %K  <  25  (Oversold)  

Evening  Star  
Filtered  Bearish  
Morning  Star  
Unfiltered  
Hammer  
Unfiltered  
 Using  OBOS  to  Filter  Candles4cks  
WMT  Weekly—10(3)
Look  for  Bearish  Candles  When  %K  >  75  (Overbought)  
Look  for  Bullish  Candles  When  %K  <  25  (Oversold)  

Harami  Line  and  Star  Setup,  

Morning  Star  Setup   and  Hanging  Man  Filtered  Bearish  
Unfiltered  
Morning  Star  Setup  
Filtered  Bullish  

Classic  Momentum  Divergence  

Bearish   Bullish  
Higher  High  in  Price     Lower  Low  in  Price    
Lower  High  in  Momentum    Higher  Low  in  Momentum  
Peak  Requires   Three-­‐Bar  Plateau,  
Lower  Bar   Tolerance  Off  by  1,  
Following,   Momentum  Leading
Tolerance  Off  by  1,  
Price  Leading  

Peaks  and  Plateaus  Example  

UNH  Daily

Peak  
Peak  
Plateau  

Tolerance  3   Peak  
Tolerance  2  
Two-­‐Bar  
Plateau   Peak   Peak  
 Double  Top  or  Boiom  Divergence  
Bearish   Bullish  
Double  Top  in  Price     Double  Boiom  in  Price    
Lower  High  in  Momentum   Higher  Low  in  Momentum  

Flat  Divergence  
Bearish   Bullish  
Higher  High  in  Price     Lower  Low  in  Price    
Double  Top  in  Momentum    Double  Boiom  in  Momentum  

The  Rela4ve  Strength  Index  (RSI)  

with  Average  
Reflects  Ra4o  of    Magnitude    
Up  Closes’  Differences  vs.  Down  Closes’  Differences  

•  U  =  If  C  >  C[1],  C  –  C[1],  Else  0  

•  D  =    If  C  <  C[1],  C[1]  –  C,  Else  0  
•  RS  =  Exponen4al  Average(U,  N)/Exponen4al  Average(D,  N)
•  RSI  =  100  –  [100/(1  +  RS)],  Average  Line  =  Average(RSI,  Y)  
 RSI  with  Average—Crossover  Entries  
UNH  Daily—21(3)  
•  RSI  Is  Oten  Choppy,  So  RSI  Average  Clarifies  
•  Not  Good  as  a  Stand-­‐Alone  Crossover  Entry  Due  to  Whipsaws  
•  Use  in  Addi4on  to  Other  Methods   Exit  L,  S  
Exit  L,  S  
Or  Wait  Un4l  Both  Lines  
Are  Out  of  Overbought  
Enter  Chart   Exit  L,  S  
Long  
Gaps  
Exit  S,  L  
Gaps  

Exit  S,  L  
Tighten  
Stops  

Whipsaws   Whipsaw  

RSI  with  Average    

Momentum  Divergence  
UNH  Daily—14(3)

Wrong   Divergent  

Correct  Comparison   Correct  Comparison  

Nondivergent   Nondivergent  
Wrong  

RSI  with  Average    

Momentum  Divergence  
CADUSD  Daily—14(3)

Wrong   Divergent   Divergent  

Wrong  

Proper  Comparison  
Nondivergent   Bridging  
Proper  Comparison  Divergent  
Rises  out  of  Oversold  
 RSI  with  Average—Comparing  Periodicity  
IBM  Daily—14(3)  vs.  34(3)  
•  Tends  to  Whipsaw  and  Some4mes  Lag  
•  Use  with  Filter  and  Other  Indicators  

Wrong  
Overbought  

Mini-­‐Divergence  
Divergent  

Not   Nondivergent  
Overbought  

 RSI  with  Average—Comparing  

Periodicity  
IBM  Daily—14(3)  vs.  34(3)

Divergent  

Nondivergent  
Divergent  
Oversold  

Not   Earlier  Cross  

Nondivergent  
Oversold  

SMAs(10,  21),  1.7  *  ATR  Stop,  

Slow  Stochas4c(14)  
AA  Daily  
Enter  on  SMA  Crossover,  Exit  on  Divergence,  OBOS,  or  Stops  
Stop  Hit,  and  Drop  out  of  OBOS  
2   Same  Bar  
Sell  
Sell   2  
Stop  Hit   x  
Drop  out  of  
Stop  Hit  
3   OBOS  
1  
x  
4  4  
Buy  
x  
Momentum     3  
1   x   Buy   Stop  Hit  
Divergence   Momentum    
Divergence  

Exit  1   Exit  2   Exit  3   Exit  4  

Divergence    0.21   Same   Divergence  0.17   Drop  OB    0.12  
Stop    0.36   Stop                          0.35   Stop                  0.27  
 SMA(10),  Long  Only,  
1.7  *  ATR  Stop,  RSI(14)  
FB  Daily  
Long  Only  on  Close  over  SMA,  Exit  on  Divergence,  OBOS,  or  Stops  
Divergence  
x   3  

ce  
Exit  Long   en
erg
Drop  out  of  OB  
2   x   Div
x   1  
Stop  Hit  

Buy  
Buy  
Stop  Hit   Stop  Hit  
Buy  

Exit  1   Exit  2   Exit  3  

Drop  OB    0.85   Divergence    2.68   Divergence    2.76  
Stop                  4.28   Stop    4.53   Stop    5.96  

Returning  to  XB  Example  

Double  MA,  Swings,  Wide  Stop,  Stochas4c  
XB  Daily  Con4nua4on—14(3)  

4a   9,  Whipsaw  (2)  
7a  

Divergent  
4b,  Earlier  Exit   7b,  Mini-­‐Divergence  Exit  10,  Earlier  Exit   11  

Three  Divergence  Exits  Allow  for  Higher  Gains  

Notes  for  Double  MA  with  Stochas4c  

XB  Daily  Con4nua4on  
4.  a.  Short  (Blue  =  Same  as  Earlier  Example)  
 b. Exit  Short  at  Much  Beier  Price  on  Divergence
 (5.  Removed,  Trade  Allowed  to  Run  Lower)  
 (6.  Removed,  No  Long  Entry)  
7.  a.  Short  
 b.  Exit  Short  at  Much  Beier  Price  on  Mini-­‐  Divergence  
 (8.  Removed,  Trade  Allowed  to  Run  Lower)  
9.  Whipsaw  
10.  Exit  Short  at  Much  Beier  Price  on  Divergence  
11.  Long  
 Longer  Bar  Stochas4c  as  Entry  Filter  
Daily  and  Weekly  Indicators  
UNH  Daily   Exit  L  
Exit  L   S  
S   S  
Exit  L  
L  
 L  
Exit  S  
Avoids  or  Reduces  
 L   Whipsaws   Exit  S  
Avoids  or  Reduces  
Exit  S   Whipsaws  

Speeding  Up  Filtering  

Kase  Permission  Stochas4c  
•  Uses  a  Sliding  Longer  Bar  Length  Window  
•  For  Example,  Most  Recent  Bar,  Filtered  by  a  5*Bar  
•  Open  of  n  –  1  Bar,  Highest  High,  Lowest  Low,  Close  of  0  
Tradi4onal  Bars  
Kase  Synthe4c  Bars  

1–5   6–10   11–15  

1–5   2–6   3–7   4–8  

Kase  Permission  Stochas4c  

Redefining  Longer  Bar  Length  
High  
Synthe4c  Bar     Synthe4c  Bar   Close  
at  Interval  X   Same   at  Interval  X  +  1  

High  

Close  
Open  
Open  

Low   Low  
 Five  Period  Kase  Permission  Stochas4c    
as  Entry  Filter,  Entries  Only  Shown  
UNH  Daily
Same   2  Bars  Earlier  
S  3  Bars  Earlier   S  
S  

2  Bars  Earlier  
L  
Avoids  or  Reduces   1  Bar  Earlier  
Whipsaws   Avoids  or  Reduces  
L  
Whipsaws  

Double  MA(3,8)    
with  Kase  Permission  Screen(5,13)  
Whipsaws  Avoided,  AID  Currency  Daily  

Summary  
•  Momentum  Indicators  Help  Time  Both  Entries
AND  Exits
•  Remember,  Precise  Exits  Are  Important!
•  Periodicity  Is  Crucial
– Shorter  =  Less  Lag,  More  False  Signals  
– Longer  =  More  Lag,  Fewer  False  Signals  
•  Adaptable  Indicators  Avoid  Constant  Fiddling
with  Periodicity
•  To  Improve  Trade  Accuracy
– Combine  Momentum  Indicators  
– Use  Mul4ple  Bar  Lengths