All language subtitles for 4. Momentum Understanding & Tricky Aspects

So momentum is pretty easy to recognize on a on a chart, but there are a couple of little things to

understand and a couple of tricky things, too, just to be aware of.

If you're using a momentum indicator and you may think, well, when the momentum line is horizontal,

you may think that momentum has stopped.

You know, that it's basically stopped in its tracks.

So that's actually not so.

It's actually the the acceleration has stopped or it's starting to slow down and it's going to accelerate

or accelerate or it's accelerating that it's going to accelerate maybe in a different direction, possibly

as it flattens out, might go up or might go down.

But it hasn't technically, you know, the price hasn't stopped or the momentum hasn't stopped.

And that's the thing.

When you look at momentum, your eye will naturally line up with the price.

It's OK with that.

We do a little bit of that previous lesson.

But you think there's a strong correlation to that, what you're seeing on the chart?

And that can be true for sure.

That's the whole idea of using momentum.

But it's not always true, you know, as far as an exact lineup there as we learn there.

So that's something just be aware of when you're looking at momentum.

A couple other things, too, is momentum sometimes does mirror the price move, you know, because

momentum is tracking the closing price of X number of days, back number, certain number of days back.

So we're looking at and it will appear as a smooth line, a smooth price line in the more days in your

lookback, period, the smoother the line we had used in another lesson, the example of ten days.

If we'd gone further back like 20 days, that will actually smooth out the line.

So if you have some real highs or low some outliers, I'll continue to smooth that out even even further.

But unlike the moving average, it does not include all the days in between.

You know, by omitting that extermination information, the line gets smoother.

So what I mean is we're looking at ten days back, we're looking at that price on that 10 day back.

So that was an outlier.

You know, that would you know, that would impact your momentum.

But it's not looking of the prices that are happening in between like a moving average one.

And that's what we're talking about.

However, if you have a one day price spike, you may see a jump in momentum for a moment, but later

you will see a sudden drop as the data is excluded from the series.

So you have that one day price spike.

Let's say it's a price spike up.

You're going to see your momentum indicator.

Have, you know, maybe more of a change, maybe more of a dramatic change, and then it's going to,

you know, account for that in the next the next day as it looks back at its lookback, period.

So the spike situation, where is where it pays to look at price is right.

We had a section around spikes and obviously looking at your open, high, low, close or candlestick

price bars and not just look at momentum, that could be a little bit misleading.

So don't necessarily trade just on the momentum indicator.

Again, different the momentum investing, but it just trading on the momentum indicator.

In fact, I think where momentum really does well is is using momentum, some use as a primary care.

But I think it works best as a secondary indicator.

So you're you're using another indicator, you know, for maybe your price or your you're seeing something

form, maybe a dog or something like that using some agap.

We looked at Agap, you're using something else and then maybe you'll use momentum to confirm that.

So it's best use as another indicator.

And if you're using it with another indicator, you can have your other indicator be the primary and

then momentum be your secondary.

Or you could also use momentum as your primary at that point.

But you would use the something else to kind of give you confirmation on it.

It's really best with momentum to have some type of pairing and not use it just all on its own.

Now, there are ways to adjust momentum or filter momentum to if you shorten the momentum time frame

like we used an example ten days.

But let's make sure that the real shortly, three days, you'll be more responsive to price changes.

It's going to be the more recent prices, right?

It's going to it's only a three day look back as opposed to a ten day.

Again, it's only looking at that specific day.

The momentum is versus a moving average.

But the idea is they'll be more sensitive to those price changes.

And if you have a shorter time frame, it's going to show more buy and sell signals.

You're going to have more whipsaws or more frequently trading.

You might have some potential losses based on false trend signals or maybe some more expense there,

depending on how you're placing your orders, because you're going to have more trading orders and that

if you reduce your time frame as far as momentum to have it be more responsive.

Another thing you can do with momentum, too, is you can filter with a training rule or apply a trading

rule.

So example, instead of buying or selling when the momentum line simply crosses the zero line, you

could say you will take a buy or sell action only when the momentum line is crossed by more than two

percent.

Right.

So it's got to be at least two percent above that zero line or two percent below that zero line for

a decision to be made.

So now, if you think about that, well, there's an opportunity cost by delaying for that two percent

to be in place.

And that's exactly true.

That's what happens with filters.

It helps strengthen your decisions, but it also costs you in terms of opportunity cost that you could

have bought in.

Let's say you could have gone in a little bit earlier and had a little bit more profit.

By by getting in earlier than waiting for that two percent to happen, but again, that'll help eliminate

whipsaws.

They'll help eliminate or help reduce whipsaws, help help strengthen your buying decisions, especially

for coupling it with another indicator saying, all right, I see this other indicator of this primary

indicator out there.

I'm going to follow my primary, use momentum as my secondary to confirm, but I'm only going to lose

my momentum to confirm if it's, let's say, two percent above the zero line.

And my primary indicator is still showing a bias signal.

Now, I feel confident to maybe make a trade, maybe even a bigger trade at that point.

So that's another way that you can kind of start pushing this together.

And later in the course, we talk about how to kind of do this and start pairing up different types

of indicators.

And momentum is great to pair up with other indicators as well.

So with that, that's the building block of momentum.

And you can just trade right on momentum or you probably see it as ARACY or rate of change.

And that's very, very effective.

But there's a couple other ones I want you to take a look at here that are in the momentum family that

build on that.

So let's look at those in the up in the next couple of lessons here, and then you can kind of choose

which one you like best.