STEP 3 :- IDENTIFYING THE STRENGTH OF THE TREND…. CONTINUED… MOMENTUM ANALYSIS..
We now know how to identify pivot highs and pivot lows, how to define the structural framework of support and resistance using our higher timeframe, how to identify the trend and the trend violation point. We also know that there is a necessity to know the strength and weakness within the trend to make a decision to gain the edge in an uncertain environment. Before going further, let me define a word which I have been using all these days but I am not sure whether you understand it or not. For the clarity sake, I will define it here itself.
What is a swing?
I hope that you are comfortable in finding the pivot high and pivot low from a candlestick chart. If you can do that perfectly, determining the swing is not a big issue. Swing is the whole price movement between a consecutive pivot high and a pivot low.
Look at one of our past images I have re-linked above. In that, A, a,2,4 are pivot highs. 1,3 are pivot lows. A-a, a-1,1-2,2-3,3-4 are the swings. It’s as simple as that. But remember, you need a consecutive pivot high and a pivot low to call it as a swing. You cannot form a swing with two pivot highs or two pivot lows.
1-2, 2-3, 3-4 are the swings in the above picture. Read it again and understand it before proceeding further as the whole concept of strength and weakness rotates around swings.
Lets start with our momentum analysis.
Momentum Analysis :-
If you are familiar with physics, momentum is the product of mass and velocity. As we are concerned with the comparison here, we will only consider the velocity to analyse the momentum of the price movement.
So, what is the velocity? Velocity is the change of a quantifiable quantity with respect to time. Here, we are dealing with price, hence, velocity is the rate of change of price.
If you hate physics like so many people out there, 😀 , don’t worry. Just remember one thing.
If the price is changing fast in comparison to the past, we say that it has greater momentum.
If the price is changing slowly in comparison to the past, we say that it has lesser momentum.
Comparison is the keyword here. We don’t want absolute values. We just need the comparisons.
We here compare the momentum of a swing with the previous swing to make a conclusion on strength.
Look at the above image. A, B,C, D, E, F and G are the pivot highs and lows within the trend. When the slope of the swing increases, we say that the momentum is increased. When the slope of the swing decreases, we say that the momentum is decreased. Don’t look at the length of swing. We are only concentrating on the slope of the swing here.
Look at the above real-time example. Look how the bulls got tired as the trend progressed and finally gave up the battle at the top that resulted in the trend change. Just the momentum change is not a sure factor to predict the trend change. But we can say that the present trend is getting weaker as the momentum is decreasing.
Increased momentum is strong.
Decreased momentum is weakness.
Acceleration and Deceleration
In the above procedure, we compared the speed of price in different swings. But the price can increase or decrease the speed in the same swing itself. The price can start slow at the start of the swing and it can move fast at the end of the swing.
Look at the above images. Here we are looking at only one swing.
In the image on the left side, the price started slow but moved with speed at the end, acceleration.
In the image on the right side, the price started with speed but slowed down at the end, deceleration.
Accelerating price in a swing is strength.
Decelerating price in a swing is weakness.
This is how they look like in realtime charts.
Too much of acceleration or deceleration is not sustainable. They will result in a complete reversal of the trend. We call them climatic reversals, which is a topic for future articles.
We are approaching the climax of this article. The following are the things that we are searching for. Keep them in mind.
If the price is in an uptrend, upswings must show strength and downswings (pullbacks in an uptrend) must show weakness. If the reverse happens, there is some weakness in the uptrend.
If the price is in a downtrend, downswings must show strength and upswings(pullbacks in a downtrend) must show weakness. If the reverse happens, there is some weakness in the downtrend.
Now, we know how to identify the momentum change. Now we have to apply them to our trading time frame chart to make a conclusion on strength and weakness within the trend. For that, you need to use the above techniques in three steps
Compare the recent swing momentum with that of the previous swing which is in the same direction of the present swing.
Compare the recent swing momentum with that of the previous swing which is in the opposite direction of the present swing.
Check whether the price is accelerating or decelerating in the present swing.
Look at the above image for example. DE is the recent swing in the trend.
First, we compare DE slope with that of BC, which is in the same direction. Here it is showing weakness in the upward direction.
Next, we compare DE slope with that of CD, which is in the opposite direction. Here, the CD is steeper than DE and hence DE is relatively weaker in comparing the with the previous downswing. If you notice, the slope of CD is greater than that of AB which means that the bears are getting stronger as the trend progresses.
Finally, we check whether there is an acceleration or deceleration in the present swing. Here, there is no evidence of acceleration or deceleration. So, we leave it like that.
Now, what is your conclusion after this study?
Bears getting stronger and Bulls getting weaker as the trend is progressing. That means the trend is getting weaker.
That’s it. we have made our conclusion with the momentum analysis.
I will add more realtime examples as the lessons progress. Until then practice everything taught here.
Practice. Practice. Practice. You might be bored with my repetition of this word almost in each and every article. But, it is the only way to learn this stuff.