Momentum

Type

Momentum Indicator

How does it work?

Momentum measures how much a securities price has changed over a given time span. It is interpreted in the same way as the Price rate of change (ROC); both indicators display the rate-of-change of a securities price. The difference being that the ROC displays it as a percentage, whereas the momentum indicator displays the rate-of-change as a ratio.

Trading Signals

There are 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 can use the short-term (e.g., 10-period, red line) moving average of the indicator to determine when it is bottoming or peaking.

If the Momentum indicator reaches extremely high or low values (relative to its historical values), you should assume a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume prices to probably climb higher. In either case, only trade after prices confirm the signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to begin to fall before selling).

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.

Settings

Sharechart Default:  10 period, 15 period, 20 period

Example