The Story Behind The Ultimate Momentum Signal and the Trading Rules
( Or Reinventing the Wheel ? )
It is said that "Necessity is the mother of all inventions". My experience with the trading business taught me that it is a fundamental truth. This is the brief story of the market forcing me to invent the Ultimate Momentum Signal and the accompanying risk management rules.
In the early nineties I tried to trade Reliance, SBI and Tisco as a hobby. It took me no time to understand that no reasonable trading is possible without the sound knowledge of technical analysis.
I studied the basic Technical Ananlysis stuff, started drawing charts of BSE Sensex, Reliance, SBI and Tisco by hand including some common momentum indicators. ( There were no computers and the internet was unheard of at that time! At least I was unaware of it! We had graph paper and pen and color pencils !!). 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 the 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 movements 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 it may help in 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 and its underlying the S&P CNX Nifty.
You can access more information on the signal and the trading rules in the next pages.
Cheers and Prosperous Trading!
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