Forex Trading System- Absolute Momentum

OVERVIEW

Within technical analysis, momentum has traditionally been defined as the differencebetween the current closing price and a closing close that occurred lagtime units ear-lier. (See Figure 8.1.)

ABSOLUTE MOMENTUM

Running momentum generates a stream of data consisting of both positive and negativenumbers whose mean approaches zero in large samples. To rectify this intrinsic mathe-matical property for the purpose of plotting composite charts, it is necessary to use theabsolute values of the momentum data streams. That is, all negative numbers are con-verted to positive numbers. (See Figure 8.2.)

Thus in composite time of day momentum charts, we are not concerned about thedirection of the processed data since all absolute momentum values are positive. Weare, however, very concerned about the magnitude of the processed data. Extreme val-ues in the absolute momentum oscillator inform us at what time of day breakouts aremost likely to occur, although we do not know which direction. This is, nonetheless,valuable information to traders, particularly those who subscribe to trend followingtechniques.

TIME OF DAY MOMENTUM CHART

The time frame 1/1/2004 to 12/31/2004 was examined in Figures 8.3 and 8.4. Runningone-minute OHLC data was employed with a five-minute absolute momentum calcu-lated every minute.

DAY OF WEEK MOMENTUM CHART

Individual time of day charts can be concatenated (this is, linked together sequentially)to create a single day of week chart. (See Figure 8.5.)

A simple visual examination of the absolute momentum charts reveals a distinct dif-ference from the time of day range charts. Momentum charts exhibit a spiky qualitywhile range charts show a more smoothed quality. Obviously, trading during these spikyperiods offers the highest potential for profit (and loss) since bold breakouts and unex-pected reversals tend to manifest themselves during these extremes. Forewarned isforearmed.

CONCLUSION

The employment of time of day and day of week charts can greatly benefit forex cur-rency traders. These activity, range, and absolute momentum charts assist traders inscheduling trading sessions based on desired volatility. For intrinsic mathematical rea-sons, the composite absolute momentum chart tends to exhibit slightly greater spiki-ness than the corresponding composite range chart covering the same time period.