In the foreign exchange market, many traders believe that there’s an easy way of gauging a market’s inertia (or the ability of prices to remain in their existing positions); it’s known to give technical analysts an accurate reading, too. With the employment of linear regression to determine volatility, it can provide details whether pursuing a similar trend or changing market direction is the more practical approach. This is where the Inertia Indicator can be of great use. What Is the Inertia Indicator?
The Inertia Indicator is a technical analysis tool that can monitor long-term trends, as well as their momentum and extensions; it was developed by a respected trader and technical analyst, Donald Dorsey. In a 1995 issue of the magazine Stocks and Commodities, it was first introduced. Behind it, the idea is to choose where the energy investment in influencing a particular market movement goes; just like the term “inertia” as discussed in physics textbooks, it can point out mass motion and direction. Moreover, the Inertia Indicator adheres to the concept that trends are relative to any outgoing market movement; conversely, any outward market activity can influence the behavior of an internal market. If it appears rather dormant for a set period, the forex market is unlikely to be on the pursuit of a trend in either direction. A concern with the Inertia Indicator is its necessity to define market mass, and as it goes, defining market mass involves the knowledge of market participants. It is, therefore, argued that it may be strategic to omit the market mass as a factor temporarily; the primary objective should be to focus on volatility. Plotting & Trade Set-up When plotting the Inertia Indicator, prepare a chart that can accommodate up to 100 points. With such a scale, you can clarify bullish or bearish market conditions. It follows that a high level of inertia is indicative of positive direction; negative market activity comes with a low level of inertia. Is the forex market, along with the market participants, in an optimistic mood? Or is it in a negative state where the market participants are in doubt regarding buy and sell positions? A systematic example: Focus on a chart with a scale of 0 up to 100. < >Determine a midpoint; use the 50th point as the center that can enable distinction of a downtrend from an uptrend.Observe crossings or any generated signal; movement near the midpoint (i.e. above or below the central point) is suggestive of an incoming trend reversal with other technical indicators. For example, if it is used along with the indicators, the Parabolic SAR and the Elliot Wave Oscillator, a more detailed analysis is possible; with the assistance of other forex tools, you can predict market directions successfully.