Dorsey Inertial Indicator is a momentum oscillator that anticipates the change in market trends and generates profitable trading ideas. Dorsey inertial compare the opening and closing price of the day and plot this information after smoothing the data.
This indicator is based on the principle that in a rising market closing price should be higher than the opening price and similarly in the falling market we expect the closing price to be lower than the opening price. Let’s try to understand the working of this trading system.
Dorsey Inertia Indicator Overview
Dorsey inertia oscillates across a center line and indicates the potential changes in a trend by comparing the close to the open. Dorsey inertia compares the past 10 periods open and close and then plots this information after calculating the average of this data.
14-period averages are used that helps to smooth the data and generate a clear signal for the market trend. If Dorsey’s inertia is above the centerline then the market is bullish. If Dorsey’s inertia is below the centerline then it is an indication of the bearish market.
Dorsey Inertia Indicator Explanation
Further, a 45-period exponential moving average is applied to this data to filter the trades. Moving averages are a very good indicator when it comes to riding the trend.
When Dorsey’s inertia and moving average move above the center line and Dorsey’s inertia is above the Red color moving average then it’s an indication of a strong uptrend.
When Dorsey’s inertia and moving average move above the center line and Dorsey’s inertia is below the Red color moving average then it’s an indication of a strong downtrend. The use of moving average in this system prevents traders from taking trades in short-term trends.
Also Read: Fibonacci Pivot Line Indicator
Dorsey Inertia: Buy Conditions
- Price should form a higher high and higher low pattern.
- Green color Dorsey Inertia indicator must move above the centerline.
- Red color EMA should move above the centerline.
- Traders can hold the trade till the time Dorsey Inertia is above the centerline.
Dorsey Inertia: Sell conditions
- Price should form lower high and lower low structure.
- Green color Dorsey Inertia indicator must move below the centerline.
- Red color EMA should move below the centerline.
- Traders can hold the trade till the time Dorsey Inertia is below the centerline.