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Daily Momentum - Short Term Trading Tool

we use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. The measures are computed by our database and can be accessed by clients. We have three different momentum calculations: daily, weekly, and monthly momentums.

Daily momentum is a very short-term trading tool. Following weekly momentum is very helpful when timing trades as well, but it gives a slightly longer horizon. It is an intermediate tool, since changes to positive or negative weekly momentum last seven weeks on average. The monthly momentum is used more to highlight or signify a longer-term turnaround.

We�ll use weekly momentum as an example, but the same principles apply to daily and monthly momentums. Weekly momentum is basically a one-week moving average compared to a five-week moving average. The moving average is also exponentially weighted and smoothed. The exact calculation is proprietary. When the one-week moving average crosses above the five-week, we say the weekly momentum is positive. This would suggest a bounce in the stock. When the one-week moving average crosses below the fiveweek, we say the weekly momentum is negative. This would suggest a pullback in the stock.

The weekly momentum calculation was created well before computer graphics became as sophisticated as they are today. At that time, it was difficult to draw two lines (the one-week and the fiveweek) and see where they crossed one another. Therefore, we turned to the actual calculation and created two columns. One column is labeled top, which is the positive column, and the other column is labeled bot, which is the negative column. As a visual, think of the line between the top and bot columns as the five-week moving average. When the calculation (or the numbers) moves from the bot column to the top column, the one-week has crossed above the five-week. Likewise, when the top column prints zeros and the bot column has a negative calculation, the one-week has crossed below the five-week moving average. The same premise applies to the daily and monthly calculations. It is simply a different time frame.

Momentum calculations are used as a supplement, not a substitution for, the point and figure chart. When we get down to evaluating the individual stock chart, the three most important parts are the relative strength, trend, and the individual patterns. Once we have determined that those three things are positive, then we look at the short-term timing tools like weekly momentum. Let�s say, for example, that we have a stock that is bullish on everything, but the weekly momentum has flipped negative. That suggests we put in our order for new positions on a pullback. Again, the momentum doesn�t change our opinion of the stock, but rather it helps us time the trade.

The charting and database system on our Web site allows you to actually pull up the table for weekly momentum, and it also tells you where the momentum would change (the cross point). For example, a stock trading at $73 may have negative weekly momentum and a cross point of $75. That would tell us the stock would have to rise to $75 to turn to positive weekly momentum. If the stock didn�t rise to $75 at the end of that week, then a new calculation is done and that cross point may have changed. Remember, you are looking at a one-week versus five-week moving average, so each week you are dropping off a week and picking up a new one in your calculation.

We look for weekly momentum that has been negative for twelve weeks or more for two reasons. First, if momentum has been negative for twelve weeks or more, the stock is likely to be on a pullback, thus giving us a stock in an overall positive trend that is on a pullback. Second, we choose twelve weeks or more because the average time momentum stays on the positive or negative side is six to eight weeks. At twelve weeks on the negative side, that is getting �long in the tooth,� and a change to positive momentum is likely just at hand. Therefore, we are getting a long-term positive stock, which has pulled back short-term, but is getting ready to start moving again.

By: Anthony Green

Best stock recommendation, tips and different stock market strategies to get success in online stock trading. All these you will get on : www.5minutetrader.com/.

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