Financial Market Fluctuations as an Advantage: Market inertia is a basic concept of financial trading. It is the idea that a moving asset will continue to move in the same direction, more or less, leaving aside retractions and corrections. Think about it, a market that suffers a trend has an inertia in the direction of that trend. Assets whose prices move upwards have an upward inertia, assets whose prices move downwards have a downward inertia.
A moving asset tends to remain moving while a standing asset tends to remain static.
In some ways, inertia could be said to represent the market’s intention to buy or sell. When an asset begins to move, the movement may be small and not very strong. If the move begins to attract more market attention and more traders put their weight into the move, the asset will begin to gain inertia. As asset prices rise or fall and market participants begin to lose interest, inertia fades. As traders, we can use this inertia to our advantage; we have to trade in line with inertia just as we would trade a trend because we don’t want the moment to take us out of the market. It is worth remembering, however, that there is no trading strategy that can give positive results in 100% of cases.
The MACD indicator is one of the best inertia tools available in the market. It can be found in the «Popular» tab when you click on the «Indicators» button in the lower left corner of the screen. Use a pair of moving averages to determine the trend and strength of the underlying market movement. The two averages, one long and one short, will cross above and below each other as the market/moment changes. When the shortest average crosses below the longest average, the moment has changed to the bearish trend and when the short average crosses above the longest average, the inertia has changed to the upside.
MACD stands for Divergent Converging Moving Average. The tool measures the strength of the market inertia by measuring the difference between the two moving averages. When the difference is positive, the short average is above the long average, and the rising momentum is bullish and rising. If the difference is positive and the decreasing momentum can be said to be in decline. As complex as this may sound, it is very easy to use the MACD Histogram, which shows the convergence and divergence of two moving averages in the form of a bar.
If the moment is rising, either bullish or bearish, traders can expect to see prices continue to rise. If the momentum is decaying, traders can expect to see the trend end very soon. An asset with increasing inertia can be traded in favor of the trend, an asset with decreasing inertia should be watched for more reversal signals.
The two main uses of inertia and input signals are escape and continuation. In escapes, prices gain momentum while trading below/over resistance/support and then release inertia when the support/resistance has been broken. This is usually a sign of a new flood of money and an ongoing new trend. Two ways of trading with such movement are short and long term. The short term method consists of trading in the direction of the rupture with expiration at the end of the current candle or the next candle. The long term method would be to wait for the post stop reversal to test the support/resistance and trade with that signal.
The second method that can be used is with continuations and trends. If an asset has a strong trend in one direction, regardless of the time period, and the MACD indicator confirms an increasing inertia, short-term retractions and consolidations can be used as inputs in favor of the trend.