Momentum indicator

From Traderpedia

The Momentum indicator measures the amount that a security's price has changed over a given time span. Momentum indicators are designed to track momentum in the price of a tradable product to help identify the relative strength of buyers and sellers involved in the price trend development.

The most commonly used momentum oscillators are:

There are basically two ways to use the Momentum indicator:

  • (1)You can use the Momentum indicator as a trend-following oscillator similar to the MACD. Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term (e.g., 9-period) moving average of the indicator to determine when it is bottoming or peaking.
  • (2)You can also use the Momentum indicator as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). This is often the case, but it is also a broad generalization.

As a market peaks, the Momentum indicator will climb sharply and then fall off: diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.

From the standpoint of trending, momentum is a very useful indicator of strength or weakness in the equity's price.