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Sunday, August 3, 2014

Momentum vs Renko

Well, I've been screwing around for days, investigating charts, listening to our online trader group share their own chart setups, and reading, reading, reading. Other blogs, mentor websites, brokerage websites, and all sorts of commentary. The Amazing Thing is that everyone has a different opinion! Imagine that! And there is that tendency to think that your way is the only way. It's just human nature.

But when I was trading options with Tasty Trade, I was more interested in probability %'s on the option chains than I was with charts (other than a simple trend chart) and daytrading was out of the question with a small account. So apart from my very early beginnings in trading (about six or seven years ago), I haven't done much research on charts. And even back then, I was learning how to read candlestick patterns and not examining other kinds of charts.

This Renko Bar chart got me going. Then a trader I know is trading /CL with a tick chart. I had already tried tick charts with a Volume Profile indicator and did very well in papertrading, but the real trading wasn't giving me the certainty I wanted. (Needed! at the time). In search of the Holy Grail...aren't we all?

Well, my next step was to set up a Momentum bar chart. This (as well as Renko bars) are fairly new additions to Think or Swim. You have to buy/pay for them on many other platforms. I wanted to see how they compared in terms of "noise" (cutting down on the choppiness) and ease of reading. I wondered if moving averages worked with both. I wondered what other indicators I could investigate that would look good to my trading eye.

I found a new (to me) indicator called "Spearman." This is what ThinkorSwim says about it and explains the settings:
The Spearman study is a technical indicator used for evaluation of trend strength and turning point detection. This study calculates Spearman's rank correlation coefficient in order to reveal correlation between actual price changes and extremely strong trend. The Spearman indicator registers two sets of data: prices of each bar during the specified period in their chronological order and the same prices sorted ascendingly. Spearman's ratio found for these two sets is then multiplied by 100; value of +100 suggests strong correlation with uptrend and -100, with downtrend.

Since the extreme values of -100 and +100 are rarely recorded, values of +80 and -80 might be used as overbought and oversold levels respectively. Plotting the Spearman indicator along with its short SMA (e.g., three day SMA on daily charts) might give an idea when to expect the turning points: look for the crossovers of the two plots. Useful information can also be obtained by analyzing action of the indicator in relation to zero level: crossing above the zero level might be an opportunity for the Long Entry while falling below zero might suggest the Short Exit.

Input Parameters
price The price to be used in calculation of Spearman's ratio.
length The number of bars in the period on which the prices are registered.
average length Defines period of SMA of Spearman indicator.
over bought Defines value of the overbought level.
over sold Defines value of the oversold level.

Plots
Spearman The Spearman plot.
SpearmanAverage The SMA of Spearman indicator.
OverBought The overbought level.
ZeroLine The zero level.

My next step was to configure, side by side, a Momentum Chart (on the left) and a Renko Chart (on the right) using similar indicators.

Here are the screens from my TOS Chart setup: Momentum first, then Renko.



I had to go back and add the Impulse indicator (blue bars) to the Momentum chart. And here are the charts, side by side: Momentum (10 ticks) on the left; Renko (10 ticks) on the right. The red lines are mine, just drawn to put your attention on how the PPS (arrows) and the Spearman crossovers line up with reverses! The moving averages and MACD are not working so well here. Maybe play with the setting some more.



Look at that Spearman indicator!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! If that's not the holy grail, what is??? I'm pleased as punch and going to start papertrading this baby tonight! MACD is looking like it's lagging even more than we know. (we KNOW it's a lagging indicator, right?)

Which one do I like most? Definitely, the Momentum. Look at the 14:00 time frame. On the Renko chart, just before 14:00 there's a yellow arrow (bearish) and then immediately a blue arrow reversal. Those two arrows don't even show up on the Momentum chart! Less noise! I like that. I'm getting happier. Knowledge is power

P.S. I smoothed out the MACD with a 3/10 setting (which matches the Spearman). I notice that the Momentum TTM Wave is smoother too than on the Renko chart. Momentum bars get my vote on this comparison, hands down. Less is more! ##

3 comments:

  1. Hi,
    Thanks for your post. A couple of questions: Are the Impulse Bars on TOS as well? What are the Impulse Bars telling you?

    Stephen

    ReplyDelete
  2. Also, it looks like these are daily charts? Do these work as well on lower time frames (if you wanted to do intraday trading)?

    Stephen

    ReplyDelete
    Replies
    1. Sorry I can't help you. I stopped trading over a year ago and I frankly have let it all drop out of my brain! You'll have to do some research or ask someone else.
      There's a lot of information out there, just keep googling. Happy trading. I miss it terribly!

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