Inertia Analysis and Inertia Signals
Created by Donald Dorsey & was originally/traditionally used to trade Stocks & Commodities market, before traders took it and started trading the market using this technical indicator.
Dorsey chose to name it "Inertia" because of his interpretation of the market trend. He claimed that a market trend is the overall result of inertia & thus it takes more energy for a trending market to reverse its direction than for it to continue heading in the same direction. Hence, a market trend is the measurement/gauge of market inertia. This is an oscillator indicator that uses scale of zero to a hundred. Signals are derived & generated using the 50 level centerline crossover trading strategy.
In physics, the term Inertia is defined in terms of mass and direction of motion. Using the standard trading analysis, the direction of motion of the market trend can be easily defined. However, the mass can't be easily defined. Dorsey claimed that the volatility of a financial instrument might be the simplest & the most accurate measurement of inertia. This theory led to the use of Relative Volatility Index, RVI as the basis to be used as a price trend indicator. Hence Inertia indicator is comprised of: RVI smoothed by a linear regression.
FX Analysis & How to Generate Signals
In trading the currency market using this technical indicator, the signals generated/derived are fairly simple to interpret. Below are 2 examples illustrated using charts showing how buy & sell trade signals are derived & generated using Inertia.
Upwards Trend - Bullish Buy Trading Signal
If the Inertia is above 50, positive inertia is indicated, this hence defines the long term trend as upwards as long as the indicator remains above 50. When the indicator crosses to levels below 50 then this is viewed as an exit trading signal. The chart below shows an example of how a buy signal gets generated.
Upwards Trend - Bullish Signal
Downwards Trend - Bearish Sell Signal
If the Inertia is below 50, negative inertia is indicated, this hence defines the long term trend as downward as long as the trading indicator remains below 50. If it crosses above 50 then this is interpreted and viewed as an exit trading signal. The currency chart below illustrates how a sell trade signal generated.
Downwards Trend - Bearish Signal
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