Price Momentum Oscillator Calculation & Strategy

Price Momentum Oscillator Indicator

The Price Momentum Oscillator is a smoothed version of ROC (Rate of Change) which is developed by Decision Point to track changes in a trend strength. This Decision Point PMO (Price Momentum Oscillator) is an oscillator, based on a ROC (Rate of Change) calculation that is smoothed twice with exponential moving averages that use a custom smoothing process. The PMO is normalized. This Oscillator can be used as a relative strength tool.

Features of Price Momentum Oscillator

  • Normally, PMO or Price Momentum Oscillator oscillates in relation to a zero line.
  • It indicates whether the strength is increasing or decreasing.
  • PMO is almost looking like another popular indicator MACD (Moving Average Convergence Divergence).
  • Generally, PMO uses a Rate of Change with a 1 bar period setting. In other words, PMO has based on the price change which means a 1-bar ROC is the same as a 1-bar price change.
  • As many sources interpret the Price Momentum Oscillator is a double-smoothed version of the¬†Rate of Change¬†indicator. So, for better understanding, it can be referred to as a double-smoothed price change.
  • The PMO technical indicator has a lag and the higher smoothing is, the bigger lag is.

How to Calculate the PMO Indicator?

We can divide PMO’s calculations into certain steps for better understanding.

In order to smooth the ROC (price change), PMO uses nontraditional EMAs (Exponential Moving Averages). Hence, the first step is to calculate the Smoothing Constant used to calculate non-traditional EMA smoothing coefficients.

  • Smoothing1 = 2/p1
  • Smoothing2 = 2/p2

Here, p1 is the first smoothing period and p2 is the second smoothing period. And, in traditional Exponential MA Smoothing is calculated as (2/(p+1)).

The second step is to calculate 1-bar ROC – 1-bar price change in%.

ROC = (P(i) – P(i-1)) / P(i-1) * 100

So, here P is a price array

Now, come to the third step. Here, apply non-traditional EMA to calculate a 1-bar price change.

ROCma = ROCmaPrev + (ROC – ROCmaPrev ) * Smoothing1, where ROCmaPrev is the previsions bar’s ROCma

Here, in order to work with higher numbers multiply ROCma by 10 times

ROCma10 = ROCma * 10

Now, in this step, apply a second non-traditional EMA to calculate PMO:

PMO = PMOprev + (ROCma10 – PMOprev) * Smoothing2

The last step is to Plot the second signal line – the signal line which uses traditional EMA applied to PMO.

PMOsignal = Smoothing3 * (PMO – PMOsignalPrev) + PMOsignalPrev

Here, Smoothing3 = 2 / (p3 + 1), where p3 is the signal line bar period over here.

How to Apply Price Momentum Oscillator (PMO) on Charts?

Here, I am going to explain the way by which you can apply the indicator on charts. For example, I have taken Zerodha Kite and Upstox Pro.

On Zerodha Kite

Traders can find the indicator under the STUDIES section in the Zerodha Kite browser app. Also, this indicator is available in the Kite mobile App. You can attach the indicator to any chart like daily, weekly, monthly, or intraday.

Price Momentum Oscillator Indicator

The Field is close and we can set the field open, high, low, or close. The Smoothing Period is 35, Double Smoothing Period is 20, and Signal Period is 10. We can change the value of the Smoothing Period, Double Smoothing Period, and Signal Period. We can also set the Overbought and Oversold values. Currently, they are set at +25 and -25 respectively. Please check the image below to understand how we attached the Price Momentum Oscillator indicator in the HDFC Bank share price chart.

Price Momentum Oscillator on Zerodha Kite

On Upstox Pro

In Upstox Pro also, the PMO setup is quite simple and straightforward. Just log in account, and go to any of your preferable charts. Open the indicator section, type down the name of the indicator, and click on apply.

Price Momentum Oscillator on Upstox

Trading Methods with Price Momentum Oscillator

If the Momentum Oscillator PMO reaches extremely high or low values (relative to its historical values), one should assume a continuation of the current trend or reversal.

Here, the overbought level is (+2.5), and the oversold is (-2.5)

Price Momentum Oscillator Trading Strategy

Another strategy is the trendline crossover strategy. Now, look at the picture below, there I draw a trendline that connects two of the higher highs together. It is advisable to sell or short sell at the crossover price. As you can see, the price went lower after the crossover.

Sell at the Crossover with PMO Indicator

Now, see the example of buy crossover. Here, I add two lower low points with a trend line, and if you buy at the crossover the price moved higher.

Buy at the Crossover with PMO Indicator

The last strategy I am going to explain is divergence. There are two types of divergence, bullish and bearish. Bearish divergence is when the price makes higher highs but PMO makes a lower low, and the price is about to fall.

Price Momentum Oscillator Divergence

On the opposite side, a bullish divergence is price makes a lower low while PMO makes a higher high. After that, the price went high.

PMO Indicator Divergence Trading

More about the Indicator

  • As a momentum indicator, the PMO expresses the direction and velocity of the price movement. In this regard, it is like other momentum indicators.
  • It is more halting trends that usually are accompanied by frequent PMO direction changes.
  • In this Price Momentum Oscillator (PMO) bottoms and tops’ price momentum have shifted direction, so it can provide early flags to price tops and bottoms in this indicator.
  • These are usually more reliable when the PMO is in the overbought or oversold territory.
  • This indicator is an internal ratio calculation vs external, such as the standard relative strength calculation, which divides one price by another price index.
  • As a result, that is normalized. We can compare it with the PMO result of any other security or index. As a result, chartists can rank a list of securities or indexes in relative strength order simply by using their PMO values.
  • The list does not have to be homogeneous ¬≠ the PMO can be used to rank market indexes, stocks, and mutual funds in the same list.

FAQ

What is Price Momentum Oscillator?

The Price Momentum Oscillator (PMO) is a technical analysis indicator that measures the rate of change in an asset’s price and expresses it as a momentum reading between 0 and 100. It can help traders spot opportunities to buy or sell.

How do you read a PMO indicator?

Generally, when the oscillator reads above 50 it indicates increasing positive momentum in an asset’s price, while readings below 50 indicate negative momentum or downtrends. When the indicator turns up and crosses above zero, that suggests an uptrend is underway; similarly, crossing below zero can signal bearish sentiment.

Which indicator is best for price momentum?

The PMO is one of many popular indicators that we use to measure short-term price movements which often precede longer-term trends. Other trailing indicators like moving averages are also reliable ways to gauge when markets may be ripe for buying/selling opportunities.

What is the use of the PMO Indicator?

Traders may use a combination of different indicators such as the PMO to identify entry/exit points within their trading strategy as well as better understand market sentiment over time by tracking how an index behaves relative to its own historical average levels without factoring in outside economic variables which intraday moves depend on heavily throughout day periods accordingly.

Conclusion :

We can use the Price Momentum Oscillator (PMO) as both a measure of relative strength, momentum, and overbought/oversold conditions. We can also use this indicator to determine price reversals using bull and bear crossovers. This is a useful tool in stock charting platforms.

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