A discussion on momentum

MajorDutch · Jan 14, 2011

So what is momentum? I was staring at my 1min EUR USD chart and thinking about it earlier today. I have studied Physics so I know scientists think of momentum = momentum x velocity = mv.

I figured all I have to do is enter trades at times of high momentum then it is likely the direction of movement will continue. I think of this like a supertanker motoring along in the ocean. It has a huge mass and a reasonable speed = m x v = a huge momentum. It takes more resistance to stop a supertanker than a speedboat even though the speedboat moves faster. If you could bet that the supertanker will move another 50 meters ahead of its current path you would think that is a safe bet even if it hit massive resistance. You would be less certain betting on the speed boat. right? So I am thinking of the forex market (or any other market with price and volume over time) as a boat which travels in the ocean at different speeds and the boat changes its mass according to the market volume.

Then I realised the 1 min chart we are trading is time and price there is no volume or mass in the science definition. So if we see a big move in one direction all this shows us is that there has been velocity (distance divided by time) we dont know what volume has been traded therefore the move in price could carry very low momentum or huge momentum we dont know the charts do not show this.

Now if I know how many lots have changed hands over a given time period this becomes more significant, a large velocity (or long bar on the chart) with a lot of volume (mass) indicates large momentum.

As Forex is an OTC market there is no true volume data this poses me with a problem. So I am thinking about taking a look at other markets, stock and futures where volume is readily available so I can investigate my theory further.

Any other traders have thoughts on momentum?

Thanks in advance:smart:

nunrgguy · Jan 15, 2011

sh5467 said:
So what is momentum? I was staring at my 1min EUR USD chart and thinking about it earlier today. I have studied Physics so I know scientists think of momentum = momentum x velocity = mv.

I figured all I have to do is enter trades at times of high momentum then it is likely the direction of movement will continue. I think of this like a supertanker motoring along in the ocean. It has a huge mass and a reasonable speed = m x v = a huge momentum. It takes more resistance to stop a supertanker than a speedboat even though the speedboat moves faster. If you could bet that the supertanker will move another 50 meters ahead of its current path you would think that is a safe bet even if it hit massive resistance. You would be less certain betting on the speed boat. right? So I am thinking of the forex market (or any other market with price and volume over time) as a boat which travels in the ocean at different speeds and the boat changes its mass according to the market volume.

Then I realised the 1 min chart we are trading is time and price there is no volume or mass in the science definition. So if we see a big move in one direction all this shows us is that there has been velocity (distance divided by time) we dont know what volume has been traded therefore the move in price could carry very low momentum or huge momentum we dont know the charts do not show this.

Now if I know how many lots have changed hands over a given time period this becomes more significant, a large velocity (or long bar on the chart) with a lot of volume (mass) indicates large momentum.

As Forex is an OTC market there is no true volume data this poses me with a problem. So I am thinking about taking a look at other markets, stock and futures where volume is readily available so I can investigate my theory further.

Any other traders have thoughts on momentum?

Thanks in advance:smart:

1. Price doesn't move in straight lines
2. There's "good" and "bad" momentum. What is the origin of the momentum, where is it coming from and where is it going, what/who is driving it?

MajorDutch · Jan 15, 2011

nunrgguy said:
1. Price doesn't move in straight lines
2. There's "good" and "bad" momentum. What is the origin of the momentum, where is it coming from and where is it going, what/who is driving it?

Price doesn't move in straight lines. Are you sure? it can either go up or down, that is pretty linear to me. Price doesn't move in 3 dimensions does it, it moves in 1 dimension. The patterns we see on your Forex screen are price pattens in time.

There is good and bad momentum? I dont get what you mean. Momentum has a value for any given time which is volume traded multiplued by price velocity (effectively the length of your bar). Where is momentum going? nowhere momentum doesnt go anywhere, price moves not momentum. Momentum has a value as above and a direction.

not sure we are talking the same language here.

DionysusToast · Jan 15, 2011

Physics will not work.

In the short term, we see something called 'acceleration' on the tape. This is a flurry of orders as people all jump on in the same direction.

Given a physics viewpoint, this would be the best time to get on as this is when there is the most momentum in one direction.

Feel free to try this a few times, you will find it is actually the worst time to get in because all the smart people were building a position BEFORE this flurry of activity occured. If there is a frenzy of buying you can bet that the people that are sellling to the 'flock' are the exit orders of the people that got in earlier.

You need to spot momentum before it occurs. It's more like a build up of pressure you want to detect. Like lava building up before a volcano.

Pity you didn't study geology, really.

TheBramble · Jan 15, 2011

sh5467 said:
Momentum has a value for any given time which is volume traded multiplued by price velocity (effectively the length of your bar).

For any given time….indeed.

Let’s forget issues regarding accuracy of volume data on FX, better yet, let’s assume they’re 100% accurate for the sake of this argument as this factor is incidental only.

All these data are for example/demonstration only: Let’s say you’re using a trading timeframe of 1 hour. You are saying that the range of the prior bar and the volume associated with that range gives you a value for momentum. If your prior bar is constituted of 55 minutes of fairly constant buying of 10,000 units every 5 minutes which raises the price 1 pip each time and has pushed the level from its opening low of X to a high of X + 11. You then, in the dying seconds of that bar get a large sell order of 110,000 units which pushes it down say 5 pips. So your range is 11 pips and your volume is 220,000 and it’s an up bar which closed 6 pips higher than it opened.

What does your current calculation for momentum tell you?

MajorDutch · Jan 15, 2011

TheBramble said:
For any given time….indeed.

Let’s forget issues regarding accuracy of volume data on FX, better yet, let’s assume they’re 100% accurate for the sake of this argument as this factor is incidental only.

All these data are for example/demonstration only: Let’s say you’re using a trading timeframe of 1 hour. You are saying that the range of the prior bar and the volume associated with that range gives you a value for momentum. If your prior bar is constituted of 55 minutes of fairly constant buying of 10,000 units every 5 minutes which raises the price 1 pip each time and has pushed the level from its opening low of X to a high of X + 11. You then, in the dying seconds of that bar get a large sell order of 110,000 units which pushes it down say 5 pips. So your range is 11 pips and your volume is 220,000 and it’s an up bar which closed 6 pips higher than it opened.

What does your current calculation for momentum tell you?

That is a very good question. momentum is instantaneous it cannot be averaged, you have got me stumped. All I can say is in the last 5 min bar momentum is 55 times stronger than when it was rising in the first 11 5 min bars. This is because there is 11 times the volume and 5 times the velocity.

I am thinking about the relationship between momentum and S/R. If we have a supertanker in an ocean it is going to need huge S/R to stop it and reverse it. On the other hand if we take a squash ball and think of the walls and the racquet as S/R the momentum of squash ball is inconsequential when hit with the racquet or wall. I think the supertanker analogy is not great as price seems to be highly influenced by S/R more like the squash ball.

Using the squash ball analogy and the walls and racquet as S/R it is clear the ball is going to keep travelling in the same direction until it hits its next S/R even if its mass changes randomly. (we are removing gravity).

So once the market leaves an area of strong S/R does it follow that it is likely to continue until it meets the next area of strong S/R? Strong S/R normally exist on the H1 time frame.

would be interested to hear from any traders who take trades as price is exiting strong S/R areas.

TheBramble · Jan 16, 2011

sh5467 said:
That is a very good question. momentum is instantaneous it cannot be averaged, you have got me stumped.

You're not stumped at all. You got it in one.

You can't assess momentum on one bar in one timeframe.

Whatever timeframe you're trading you might want to look at the next TF down to see what your last bar looked like 'over time'.

Hotch · Jan 16, 2011

sh5467 said:
I have studied Physics so I know scientists think of momentum = momentum x velocity = mv.

I lol'd

nunrgguy · Jan 16, 2011

sh5467 said:
Price doesn't move in straight lines. Are you sure? it can either go up or down, that is pretty linear to me. Price doesn't move in 3 dimensions does it, it moves in 1 dimension. The patterns we see on your Forex screen are price pattens in time.

There is good and bad momentum? I dont get what you mean. Momentum has a value for any given time which is volume traded multiplued by price velocity (effectively the length of your bar). Where is momentum going? nowhere momentum doesnt go anywhere, price moves not momentum. Momentum has a value as above and a direction.

not sure we are talking the same language here.

Yes we are speaking the same language. Try adding the word price somewhere into my reply

Exactly, it (i.e; price) can go either up or down, one dimension, two directions. Just because you see price accelerate in one direction over a time period (you were talking a minute?) you cannot assume it will immediately continue in the same direction.

Price oscillates. The smaller the time period you see the 'momentum' occur over, the less significant it is. Plus you have an additional problem: if we're talking major momentum are you going to get filled at your price, and what is spread doing?

My degree a hundred years ago was in Electronic Engineering, I understand basic Physics but when it comes to trading I'm a Luddite. Traders aren't physicians and don't need to be. When mathematicians and physicians get involved in studying the market, as opposed to actually trading it, there's generally a couple of outcomes: either a study saying it's impossible to make money or some new fangled magical indicator that's another 4 steps away from the market and anyone ever making any money using it.

"Good" and "Bad" momentum: WHAT is causing the price movement and where is the price movement occurring. Is it momentum at the start of a move or is it a momentum blow-off at the end of a move where you should be liquidating, not entering. If you're entering just because you see momentum then heaven help you if you're a weak buyer buying straight into resistance....but you could be a sub-minute, front running, HFT hyper-scalper running a super computer straight into the exchange for all I know?

MajorDutch · Jan 16, 2011

it should read momentum = mass x velocity, i guess this is what you are lol'd about, I cant believe nobody else picked this up.

MajorDutch · Jan 16, 2011

nunrgguy said:
Yes we are speaking the same language. Try adding the word price somewhere into my reply

Exactly, it (i.e; price) can go either up or down, one dimension, two directions. Just because you see price accelerate in one direction over a time period (you were talking a minute?) you cannot assume it will immediately continue in the same direction.

Price oscillates. The smaller the time period you see the 'momentum' occur over, the less significant it is. Plus you have an additional problem: if we're talking major momentum are you going to get filled at your price, and what is spread doing?

My degree a hundred years ago was in Electronic Engineering, I understand basic Physics but when it comes to trading I'm a Luddite. Traders aren't physicians and don't need to be. When mathematicians and physicians get involved in studying the market, as opposed to actually trading it, there's generally a couple of outcomes: either a study saying it's impossible to make money or some new fangled magical indicator that's another 4 steps away from the market and anyone ever making any money using it.

"Good" and "Bad" momentum: WHAT is causing the price movement and where is the price movement occurring. Is it momentum at the start of a move or is it a momentum blow-off at the end of a move where you should be liquidating, not entering. If you're entering just because you see momentum then heaven help you if you're a weak buyer buying straight into resistance....but you could be a sub-minute, front running, HFT hyper-scalper running a super computer straight into the exchange for all I know?

I get yah. FYI a Physician is a medical practitioner, I think you were referring to a Physicist. my splnelig is ****ing afwul as wlel.

nunrgguy · Jan 16, 2011

sh5467 said:
I get yah. FYI a Physician is a medical practitioner, I think you were referring to a Physicist. my splnelig is ****ing afwul as wlel.

Oh yes.
DOH:smart:
I've been having terrible problems lately getting the right words out, even remembering them. Start of dementia no doubt.

ZT Strategy · Jan 24, 2011

Regarding volume (or mass), how about simplifying this by trading session. Depending on currency but assume that high velocity moves during the busy time of the London session have got more momentum than other sessions.

Look for currencies showing increasing momentum on a larger timeframe and then drop down to the smaller timeframe and enter the market when momentum is increasing in the direction of the larger timeframe.

I would guess this would be a scalping system targetting small profits.

A discussion on momentum

MajorDutch

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