Momentum trading definition
Momentum trading is used to capture moves in shorter timeframes than trends. Momentum is the relative change occurring in markets. Relative change is different to a trend. A long-term trend can be up but the short-term momentum of a specific market can be 0.
If a market moves down and then moves up and then moves back down the net relative change in price is 0. That means momentum is 0.
A short-term positive momentum, with a long-term downtrend results in markets with no momentum.
MacroVar Momentum Trading model
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 4 calculations for each asset. The timeframes monitored are the following:
- 1 Day (1 trading day)
- 1 Week (5 trading days)
- 1 Month (20 trading days)
- 3 Months (60 trading days)
For each timeframe, the following calculations are performed:
- Calculations of the return for the specific timeframe
- If return calculated is higher than 0, signal value 1 else signal value -1
Finally, the 4 values are aggregated daily.
A technical rollover is identified when MacroVar momentum strength indicator moves from positive to negative value or vice-versa.
The most important trend indicator
The 52-week simple moving average and its slope are the most important indicators defining a market’s trend. An uptrend is characterised by price above the 52-week moving average followed by an upward slope. If fundamentals of the market have not changed and the moving average slope is still in uptrend, a price drop signifies a market correction and not a change of trend. Traders should watch oscillators like MacroVar oscillator and RSI to buy the dip and still follow the trend. The moving average slope turn signifies a change of trend.