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The Better Momentum Indicator | Emini-Watch.com 23.01.

2019, 22)39

The Better Momentum


Indicator
Updated: Saturday 27 January 2018

BUY NOW NEXT: BETTER PRO AM

Stop measuring price and start measuring demand and supply.

Momentum indicators have been calculated based on changes in price for


decades. But that doesn’t make any sense – you’re just measuring the
result, not the driving force. The driving force is demand and supply
volume – the energy that drives prices. So why not use a Momentum
Indicator that calculates buying and selling volume?

“Better Momentum is my most valuable trading tool.” Jack B.

“I am sold on your Better Momentum indicator.” Steve McG.

“You make volume as visual as price.” Ralph R.

That’s what Better Momentum does – that’s why it’s a “better” Momentum
Indicator – plus it generates demand and supply signals. It’s one of my 3
non-correlated indicators. The other 2 are Better Sine Wave (measures
price) and Better Pro Am (measures average trade size).

The trend changes when price and volume


diverge

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Momentum Indicator Divergence (Emini 2,097


tick)

“Why do markets turn?” The answer to this question is the secret to


trading – the essence of speculating. Here’s my best answer:

Markets bottom when all the sellers have sold (i.e. selling volume
dries up)
Markets top out when all the buyers have bought (i.e. buying volume
dries up)

The next logical question then is “How do I know when all the sellers have
sold or all the buyers have bought?” And that’s where measuring volume
momentum comes in.

Let’s take the example of an uptrend. The move starts off with an explosion
of buying that takes the market past a significant resistance level. In the

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early part of the move Professionals, large volume traders are active. On
any dips the buyers step back in and continue to drive the market higher.

However, as the move progresses, Amateurs, who trade smaller volume,


start to join in. Price continues to advance but eventually fewer and fewer
buyers, with less and less buying volume, are participating. Professional
traders start taking profits on any advances and the buying volume starts
to decline.

Eventually, a point is reached when all the buyers have bought. The market
tops out and price starts to reverse. Sometimes we move straight into a
downtrend. At other times we get a final blow off buying climax –
Amateurs desperate to finally get on board. But the trend has changed and
it’s now time to exit Long positions and Short.

The chart above is a 2,097 tick bar chart of the Emini and highlights two
reversals. The bottom was formed when a new low was made but the
selling volume (as shown by the Better Momentum indicator) dried up.
Similarly, the top was formed when a new high was made but the buying
volume dried up. The red and white dots on the indicator and price bars
indicate when buying and selling starts declining.

Measure changes in buying/selling volume,


not price

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Momentum Indicator Volume versus Price (Emini


699 tick)

The traditional Momentum Indicator, which seems to have no inventor,


has been around forever. It has done a great job in the past of measuring
the decline in Momentum as the uptrend move described earlier loses
power. But it has a fatal flaw – it measures the change in price, not buying
or selling volume.

In years gone by, the only timely data traders had available was price.
Volume data was either not available or was delayed. But times have
changed. My data feed not only tells me the volume of every single trade,
but whether it took place on the bid or the ask! Extraordinary, really. So
let’s make an improved Momentum indicator.

The Better Momentum indicator measures these waves of buying and


selling volume and tells you when there is Bullish or Bearish Divergence.

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That is, in a downtrend, price is making new lows but the selling volume is
becoming less and less – setting up for a reversal. And vice versa for an
uptrend.

The chart above is a 699 tick bar chart of the Emini and shows the Better
Momentum indicator (volume based) along side the traditional
Momentum indicator (price based) with the same settings. As you can see
for the highlighted turning point, the Better Momentum indicator correctly
identified fewer sellers participating in the move and a likely reversal. The
traditional Momentum indicator totally missed that a turning point was
being formed.

Better Momentum generates 4 signals at


turning points

Better Momentum Indicator Signals (Emini 4,500


tick)
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The Better Momentum signals generated follow the progression of a


change in trend:

1. Exhaustion Selling or Buying (large cyan/blue dot)


2. First Bullish or Bearish volume divergence (large red or white dot)
3. Flush Selling or Buying volume (large yellow dot)
4. And secondary Bullish or Bearish divergence signals (small red or
white dot)

You need to wait for at least the First Bullish or Bearish divergence signal
to plot before entering a reversal trade. And in some cases it is necessary to
wait for the Flush volume pattern to signal – showing that the last of the
sellers or buyers have been “flushed” out of the market and the trend can
now reverse with little resistance.

The divergence algorithm used by the Better Momentum indicator is quite


sophisticated. It doesn’t just look for the current peak to be less than the
previous peak. But instead compares the current peak with a statistically
significant prior peak.

There can be a slight delay in the printing of divergence signals as a peak


has to be confirmed. However, this delay is not usually a problem for
trading because the divergence signals lead the market.

Note: The Better Momentum signals plot in real-time on the price bars.
But the signals are back-plotted on the momentum line itself. This is to
show the peak or valley in momentum that actually generated the signal.

Confirm Momentum signals with non-


correlated indicators

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Better Momentum indicator with Better Sine Wave


(Emini 4,500 tick)

The best way to use the Better Momentum indicator is with confirming,
non-correlated indicators. Since the Better Momentum indicator is
measuring waves of buying and selling, I use price cycles and average trade
size as my confirming indicators.

High probability trades set up when you get all 3 signals lining up. For
example:

1. Bullish Divergence on Better Momentum with lower prices but less


selling volume
2. “End of Trend” signals on the Better Sine Wave indicator, and
3. Professional buying on the Better Pro Am indicator (not shown)

The last trick to identifying high probability trades is using these 3 non-

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correlated tools (Better Momentum, Better Sine Wave and Better Pro Am)
on multiple time frames.

More screenshots of Better Momentum in action

Case studies of Better Momentum in action

Summary
This article should have convinced you to:

Update your Momentum Indicator to measure volume not


price. Modern data feeds now show you buying volume (demand)
and selling volume (supply). Traditional Momentum Indicators only
used price as a proxy for demand and supply because the volume data
was not available when they were conceived.
Only take reversal trades after you see Exhaustion Volume.
Exhaustion Volume needs to be present to confirm a bottom or top –
all the sellers need to have sold (i.e. selling volume dried up) or all the
buyers need to have bought (i.e. buying volume dried up) for a
reversal in the market to take place.
Wait for Bullish or Bearish Divergence to signal a market is
ready to turn. After Exhaustion Volume look for Divergence
patterns where, in the case of a market bottom, price makes a lower
low but selling volume makes a higher low (Bullish Divergence). In
the case of a market top, price makes a higher high but buying volume
makes a lower high (Bearish Divergence).
Look for confirmation from non-correlated trading
indicators. In my trading I use 2 non-correlated indicators: Better
Pro Am to identify Professional and Amateur activity and Better Sine
Wave to identify Support and Resistance levels. High probability
trades can be found by combining these Bullish and Bearish
Divergence signals on the Better Momentum indicator with
Professional activity supporting a change in trend and breaks of key
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Support or Resistance levels.

What people are saying about Better Momentum

BUY NOW

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