Inertia Analysis and Inertia Signals
Created by Donald Dorsey & was originally used to trade Stocks & Commodities market, before traders took it and started trading the market using this technical indicator.
Dorsey chose to name it "Inertia" because of his interpretation of the market trend. He claimed that a market trend is the overall result of inertia & thus it takes more momentum for a trending market to reverse its direction than to continue heading in the same direction. Hence, a market trend is the measurement of market inertia. This is an oscillator trading that uses the scale of zero to a hundred. Signals are generated using the 50 level centerline cross-over trading strategy.
In physics, the term Inertia is defined in terms of mass and direction of motion. Using the standard trading analysis, the direction of motion of the market trend can be easily defined. However, the mass can't be easily defined. Dorsey claimed that the volatility of a financial instrument might be the simplest & the most accurate measurement of inertia. This theory led to the use of the Relative Volatility Index (RVI) as the basis to be used as a price trend indicator. Hence Inertia technical indicator is comprised of: RVI smoothed by a linear regression.
FX Analysis and How to Generate Signals
In trading the currency market using this technical indicator, the signals generated are fairly simple to interpret. Below are 2 examples illustrated using charts showing how buy and sell trade signals are generated using Inertia.
Upwards Trend - Bullish Buy Signal
If the Inertia is above 50, positive inertia is indicated, this hence defines the long term trend as upwards as long as the technical indicator remains above 50. When it crosses to levels below 50 then this is interpreted as an exit signal. The chart below shows an example of how a buy signal gets generated.
Upwards Trend - Bullish Signal
Downwards Trend - Bearish Sell Trading Signal
If the Inertia is below 50, negative inertia is indicated, this hence defines the long term trend as downward as long as the trading indicator remains below 50. If it goes above 50 then this is interpreted as an exit signal. The currency chart below illustrates how a sell trade signal generated.
Downwards Trend - Bearish Signal
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