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In technical analysis, momentum is the price difference between the current price and a price n bars in the past. If the current price is much higher than the price n bars in the past, the market has a lot of momentum. Momentum is normally calculated as a percentage.
One major problem with using momentum-based indicators is that the optimal lookback period seems to change over time. The Polychromatic Momentum indicator solves this problem by calculating a weighted average of 20 lookback periods.
These are the advantages of the Polychromatic Momentum indicator system:
Tip: Traders can display the weighted average momentum in their chart or they can display all 20 individual momentum indicator lines. Each line has a different colour, hence the name Polychromatic (multi-colour) indicator.
This example shows the Polychromatic Momentum indicator in red. More about the black bands later.
This example shows the 20 momentum indicators, which make up the PMI. Each indicator is calculated over 20 different horizons.
The Polychromatic Momentum system also calculates two normalised lines based on the highest and the lowest momentum. These lines are black lines in the chart.
The Polychromatic Momentum indicator can be used as a trend filter. The trend filter indicates when the market is in a positive trend by colouring the chart background green. When the market is in a negative trend, the chart background is red.
The Polychromatic Momentum system can also be used a trading signal. When the PMI is below the black lines, momentum is considered to be bearish. This a short sell signal. When the PMI is above the black lines, momentum is considered to be bullish. This is a buy signal.
This example shows the trend and two trading signals. The first signal is a short sell signal. The signal appears when the PMI drops below both black lines. The second signal is a buy signal. The buy signal appears when the PMI is above both black lines. The background colour in the chart indicates the trend.
This example shows a buy signal. The buy signal appears when the PMI (not shown in the chart) is above both black lines. After the signal the trend remains positive as indicated by the green chart background.
More client proposals: the Fibonacci moving average and the coloured moving average