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. In Physics, Inertia is the tendency of an object to resist to acceleration. Dorsey has chosen this name because he believes that trend and inertia are related and that it takes more effort and energy to reverse the direction of a stock or market than to keep it in the same direction.
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 is plotted on a scale of 0 to 100 and its middle level of 50 acts as a threshold separating uptrends from downtrends. Thus, crossings beneath or above the line suggests a trend reversal is most likely in process, which generates entry signals or exits out of current with-trend positions.
This is what the Inertia Indicator looks like on the 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.
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.
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.
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.
Calculation
The Inertia Indicator is constructed by first calculating the Relative Volatility Index and then smoothing the index by the Linear Regression Indicator. This indicator takes three parameters. The first two parameters are the standard deviation and smoothing Exponential Moving Average periods for the Relativity Volatility Index calculation. The third parameter is the period used with the Linear Regression Indicator.
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 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 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. The inertia indicator measures the market, stock or currency pair momentum and trend by measuring the security smoothed RVI (Relative Volatility Index). The RVI is a technical indicator that estimates the general direction of the volatility of an asset.
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