momentum is said to be giving indication about the current pace/strength of a trend and its reaction over the prices of a script.
Trying momentum over weekly nifty chart.
there are four conditions of CCI momentum indicator. these conditions may be similar or same with other momentum indicators, but I have been only able to understand CCI a bit.
condition 1 - momentum increases and price increases
condition 2 - momentum decreases and price decreases
condition 3 - momentum increases and price decreases
condition 4 - momentum decreases and price increases
condition 1 - when momentum increases and price also increases; this indicates a healthy upmove in the market.
condition 2 - when momentum decreases and price also decreases; this also indicates a genuine and healthy corrective move in the market.
condition 3 and 4 are opposite of their respective conditions 1 and 2. Such situations usually occur when price has crossed some importance support or resistance level; or the market has turned against the apparent expectations.
what momentum can do:
momentum can help in deciding, whether the trade being entered is corresponding to suitable momentum or otherwise. Momentum also helps in deciding the overbought and oversold conditions; but this differ from script to script. That is, one single setting of momentum is not supposed to work on all scripts equally. But where it works suitably, it can give very useful information of expected move in the future.
The very simple way of using momentum (CCI) is to match its current position with similar position in the recent past; and then compare the prices.
CCI can also help in taking an early entry into the trend being building or about to build, and help in minimizing the risk.
For example, the following weekly chart of Nifty can be taken into consideration.
As can be seen that Nifty had a triangle breakout which worked quite well. Now, because I can see it now as it happened in the past, it appears quite easy to trade it. But the point is, would I actually have traded it at that time. Well, I don't think so because of the following reasons:
Reason 1 - The support line of the triangle could only be drawn after seeing the next two-three candles of this breakout. The first support level of blue candle (31 Oct 20098, from where the support line has started; and the second support level (6 march 2009) has a huge time gap and it is only after the another support level (13 March 2009) near the second level of 6th March 2009 that one can think of putting a support line at these levels.
Reason 2 - The breakout candle has a high of 3123 and closed at 3108. Now, if we look at the starting point of resistance line (marked as E), it had a high of 3240. The second point of resistance level which is marked as F has a high of 3106. The difference of breakout candle is marginally close to the point F and low below the point E. When this breakout had actually occured and if I am not familiar with momentum indicator (here I am using CCI), it really would have been very very difficult for me to enter confidently into this trade.
Reason 3 - As has been suggested by all great traders, that never ever enter any trade without having any stoploss value. If I would have only traded this breakout I have to keep my stoploss below point D i.e. below 2555 which would rationally had been between 2550 - 2530. Hence, entering mere on the basis of trendline price pattern breakout, which occured at 3123 and having a stoploss of around 570 points (3123- 2550) would not have appeared a wise decision. And the chances are more that I would have missed this good opportunity, if I would have been trading only on the basis of trend line and price patterns.
Chart is given below for reference. and I will be trying to understand how momentum can help in dealing with this issue; and will post it later.
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