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Price Momentum Oscillator Settings, Trading Method

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 ROF (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.

Key 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 Rate of Change with 1 bar period setting. In other words, PMO has based on the price change that means 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?

PMO’s calculations can be divided into certain steps for better understanding.

1. In order to smooth the ROC (price change), PMO uses nontraditional EMAs (Exponential Moving Average). 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
p2 is the second smoothing period

And, in traditional Exponential MA Smoothing is calculated as (2/(p+1))

2. 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

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

ROCma = ROCmaPrev + (ROC – ROCmaPrev ) * Smoothing1

where ROCmaPrev is the previsions bar’s ROCma

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

ROCma10 = ROCma * 10

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

PMO = PMOprev + (ROCma10 – PMOprev) * Smoothing2

6. The last step is to Plot 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 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.

Apply PMO 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 on to any charts likes 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 value. 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

Apply PMO on Upstox Pro

In Upstox also, PMO set up is quite simple and straight forward. Just login account, go to any of your preferable charts. Open indicator section, type down the name of the indicator and click on apply.

What are the Top Trading Methods of 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 oversold is (-2.5)

Price Momentum Oscillator

Another strategy is the trendline crossover strategy. Now, look at the picture below, there I draw a trendline which connects two of the higher high 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

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

Buy at the crossover

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

Price momentum oscillator Bearish

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 Bullish Divergence

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 usually are accompanied by frequent PMO direction changes.
  • In this Price Momentum Oscillator (PMO) bottoms and tops price momentum has 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.

Conclusion :

The Price Momentum Oscillator (PMO) can be used as both a measure of relative strength, momentum, and overbought/oversold conditions. This indicator can also be used to determine price reversals using bull and bear crossovers.

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