Leading indicators with momentum
by John Ehlers
Newcomers to technical trading are often confused by terminology. Oscillators don't oscillate and
stochastics have nothing to do with random variables. Neither does momentum describe the force
required to bring a moving body to rest. In the simplest case, momentum is just the difference between
two time-related variables. I have found that, when combined with moving averages, momentum can
produce some useful indicators.
Because momentum measures the difference of two elements in time, we can consider it a measure of the
rate of change. More specifically, momentum can be considered the I equivalent of the derivative of a
continuous function, the opposite of the integral in calculus. From this we can draw some interesting
general conclusions about the properties of momentum, two of which hold the most interest to traders.
The first momentum property is that it detrends the time function. By taking the difference of day-to-day
variations, the slower variations of the trend are greatly reduced relative to the shorter variations. As a
result, trend is "filtered" out, leaving short-term tactical trading opportunities.