Acceleration

05/24/00 10:34:41 AM

by Sean Moore

Many technical indicators and trading systems aim to identify market acceleration and deceleration. This acceleration factor can be a good indication of changing market momentum.

Security: GE
Position: N/A

Over the years, many indicators have been developed for measuring market acceleration. Acceleration is a sign of positive changes to momentum, while deceleration is a sign of negative changes to momentum. Momentum is defined as the speed of a price's movement, and acceleration is the speeding up or slowing down of the momentum. They are used to detect changes in the market direction.

A common momentum indicator that can be used to help denote market acceleration is the Moving Average Convergence/Divergence (MACD). This indicator can be plotted with a bar chart showing the difference between a fast (shorter-period) moving average and a slow (longer-period) moving average. You can either use a simple or exponential moving average to calculate the MACD. When the faster moving average crosses above the slower moving average, it is a sign of positive acceleration (momentum is increasing) and, thus is a potential entry point. Conversely, when the faster moving average crosses below the slower moving average, it is a potential exit point. This indicator works best in a trending market but tends to lose its efficiency in a volatile one because it will generate whipsaws.

Figure 1: Daily bar chart for GE plotted with 12/26 moving averages and MACD. MACD histogram plots momentum. Changing momentum denotes acceleration

Graphic provided by: TradeStation.

Figure 1 shows a daily bar chart for General Electric Co. The 12-day simple moving average (red line) and 26-day simple moving average (blue line) are plotted across the daily OHLC bars. Buy and sell signals are created when the two lines cross.

The concept of acceleration within the financial markets has certainly been an important issue behind measuring market momentum. The MACD is a visual representation of market momentum. The rate at which this momentum changes is defined as the acceleration and changes in this acceleration are often followed by a reversal of price direction or a significant upward or downward move.

Sean Moore

Traders.com Staff Writer.

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