What Is The Inertia Indicator & How To Trade With It

In Physics, inertia is a continuous motion of the body until an outside force acts upon it. In financial markets, the concept of inertia was given by Donald Dorsey in the 1995 issue of Technical Analysis of Stocks and Commodities through the Inertia Indicator.

The Inertia Indicator is moment-based and is an extension of Dorsey’s Relative Volatility Index (RVI). It defines the long-term trend and the distance of its extension.

What is the Inertia Indicator?

Dorsey stated that a trend is an “outward result of inertia.” According to him, the market takes greater force to reverse its course than to continue moving in the same direction.

The direction of the trend can be determined by using technical analysis. However, defining mass is complicated. The author argued that volatility could measure inertia. Therefore, he used RVI with the Linear Regression Indicator to smooth the Inertia Indicator.

The Inertia Indicator has values from 0 to 100, where 50 is the neutral level. The market is uptrend when the Inertia Indicator shows values above 50 and in a downtrend when it has values below 50.

This is what the Inertia Indicator looks like on the chart.

Inertia Indicator on a chart
Inertia Indicator on a chart

To set the indicator on MT4, you can change the input values to adjust to your own forex trading strategy or leave it as default.  The indicator is presented in the form of a line.

Inertia Indicator parameters
Inertia Indicator parameters

How to use the Inertia Indicator?

As we mentioned before, the Inertia Indicator is momentum-based. This means that the indicator will show the moment of the price over time and a market reversal.

The crossings of the Inertia Indicator above and below the line indicate a trend reversal. This generates the entry and exit signals.

If the Inertia Indicator is below 50 and then rises, it generates a buy signal. When the Inertia Indicator is above 50 and drops, this is a sell signal, and we may look to close long positions.

The Inertia Indicator can help in finding the bullish and bearish divergences. When the market is in an uptrend and continues to move in the same direction, but then it no longer moves in the same direction, this is a sign of bearish divergence.

Inertia Indicator bearish divergence
Inertia Indicator bearish divergence

On the other hand, when the market moves in a downtrend continuously, and then changes its direction to an uptrend, this is a bullish divergence.

Inertia Indicator bullish divergence
Inertia Indicator bullish divergence

The Inertia Indicator is preferable for discovering long-term trends. To form a forex trading system, we could combine the Inertia Indicator with the 13-day EMA and weekly MACD.

Once we identify the long-term trends, we can switch to daily charts and look for the weekly trend direction.

Inertia Indicator trading strategies

The Inertia Indicator is a helpful tool in using various trading strategies.

I would personally prefer to use the Inertia Indicator for long-term trading. Day traders can also take advantage of it by discovering the long-term trend.

But I wouldn’t depend solely on the Inertia Indicator. I would combine it with other indicators like Parabolic SAR to form a more complete trading strategy and for confirmation of trading signals.

Inertia Indicator buy strategy

  • The market should be in an uptrend.
  • The value of the Inertia Indicator should cross above the 50 level.
  • Set a stop-loss near the recent swing low area.
  • Exit the trade when the indicator drops below 50.
Inertia Indicator buy setup
Inertia Indicator buy setup

Inertia Indicator sell strategy

  • The market should be in a downtrend.
  • The Inertia Indicator should cross below the level 50.
  • Set a stop-loss near the recent swing high.
  • Exit the trade when the indicator rises above 50.
Inertia Indicator sell setup
Inertia Indicator sell setup

Inertia Indicator Conclusion

The Inertia Indicator is a powerful momentum-based indicator. It determines not only the trend but also its distance, which can be used for predicting the long-term trend. You could combine the Inertia Indicator with other technical indicators for swing trading strategies.

The Inertia indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the Inertia indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Inertia indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Inertia indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Inertia indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!