Absolute Momentum Indicator

The Absolute Momentum indicator is a trend-following tool designed to measure the excess return of an asset relative to a risk-free rate, helping traders identify periods of positive momentum.

Usage

The Absolute Momentum indicator is primarily used to identify trend direction and potential entry or exit points based on the asset's performance relative to a benchmark (typically a Treasury bill rate).

• Trend Identification: When the Absolute Momentum line is above the zero level, it indicates that the asset has a positive excess return, suggesting a bullish trend. Conversely, a value below zero suggests a bearish trend or underperformance relative to the risk-free rate.
• Bar Coloring: The indicator includes a bar-coloring feature where green bars represent positive absolute momentum and red bars represent negative absolute momentum.
• Smoothing: A secondary smoothed line is provided to help filter out market noise and focus on the broader momentum trend.

Details

This implementation is based on the concepts popularized by Gary Antonacci in his research on Dual Momentum. Absolute momentum (also known as "time-series momentum") looks at an asset's own past return. By subtracting the return of a risk-free instrument (like SHY or short-term Treasury bills) from the asset's return over a specific lookback period, the indicator isolates the "excess" return. If this value is positive, the asset is considered to have positive absolute momentum.

Settings

• LookBack Period: Defines the number of bars used to calculate the Rate of Change (ROC) for both the current asset and the benchmark symbol.
• Symbol: The ticker symbol used as the risk-free rate or benchmark (default is "SHY").
• Smooth Period: The length of the Simple Moving Average (SMA) applied to the absolute momentum calculation for the smoothed output line.

FAQ

How do I interpret the zero line in Absolute Momentum? The zero line represents the break-even point where the asset's return equals the benchmark's return. Crossing above zero is often viewed as a buy signal, while crossing below is a sell or exit signal.

Can I change the benchmark symbol? Yes, the indicator allows you to input any symbol (such as BIL, SHV, or even a different asset class) to calculate the relative performance.

How can I access the Absolute Momentum indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.