The Momentum Cross Trading Strategy

Creating the Momentum Cross Trading Strategy.

Sofien Kaabar, CFA

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Crossing momentum might signify a paradigm shift. This can be seen as the equivalent of a moving average cross, only it uses a completely different method. The idea is to create two momentum Indicators different in periods, and then have a look at their cross as a signal that a new trend is emerging.

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The Momentum Indicator

The momentum indicator’s formula is extremely simple and can be summed up in the below mathematical representation:

What the above says is that we can divide the latest (or current) closing price by the closing price of a previously selected period, then we multiply by 100. Hence, if we say we are going to use Momentum(14), then, we will subtract the current values from the values 14 periods ago and then divide by 100.

The Momentum Indicator is not bounded as can be seen from the formula, which is why we need to form a strategy that can give us signals from its movements.

EURUSD in the first panel with the 5-period Momentum Indicator in the second panel.

The above graph shows the EURUSD values versus the momentum indicator of 5 periods. This means we are simply dividing the current closing price by the price 5 periods ago and multiplying by 100. Below is the Python code to create a function that calculates the Momentum Indicator on an OHLC array.

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