Tuesday, February 2, 2010

More on the Momentum Signal

They say "Necessity is the mother of all inventions". My experience says that it is a fundamental truth. This is the story of the market forcing me to invent the Ultimate Momentum Signal.

In the early nineties I tried to trade Reliance and Tisco as a hobby. It took me no time to
understand that no reasonable trading is possible without some knowledge of technical analysis.

I studied the basic TA stuff, started drawing charts of Sensex, Reliance and Tisco by hand including the common momentum indicators. The main problem encountered at that time was the choice of suitable time frames for the hand drawn indicators. When you are drawing indicators by hand after a long process of calculations, well it is impossible to change the time frames. Once you choose somewhat suitable time frames the next problem is the diametrically opposite signals given by the different indicators.

To solve this problem I tried to combine the different momentum indicators of different time frames by assigning different weights to each of them. That's how I made the Ultimate Momentum Signal for position trading.

But problems were still plenty in the areas of risk management. How a market derived stop loss point can be set up? What is an ideal position limit that will not only keep you in trading in the long term and also prevent the risk of ruin?

Experience showed that stocks have comparatively high daily movement in percentage terms and therefore stop loss points will have to be set up at comparatively far places. However, it was observed that the BSE Sensex moved far more orderly than the single stocks and thereby solving the problems in risk management to manageable limits.

As Nifty futures is the most traded index future, the trading signal and the risk management rules invented for the Sensex is now applied to the Nifty Futures.

Cheers and Happy Trading!

A word of caution too! Please read the risk factors and the disclaimer in the Info and Instructions document.

Here is the link to my profile from where you can check out the five year history of the Momentum Signal and the Risk Management Rules thereof:

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