Momentum

May 05, 2021

Momentum is the difference between current price and the price a specified number of bars ago, Period. The momentum indicator shows the speed at which price changes from one period to another. It gives an excellent indication of the market participant’s commitment to the current trend. When the momentum begins to slow or turn, it indicates diminishing commitment and a loss of momentum. This indicator is a leading or coincidental indicator. A momentum value above zero indicates that prices are moving up, and below zero moving down. The momentum indicator has overbought and oversold zones. These zones are defined by lines that are placed so the Momentum indicator spends about 5% of its time within the zones. The lines should be adjusted according to market conditions.

Interpretation:

  • In ranging markets, go long when the indicator falls below the oversold line then rises back above the oversold line.
  • In ranging markets, go short when indicator rises above the overbought line the falls back below the overbought line.
  • In ranging markets, go long on bullish divergences, if the indicator’s first trough is in the oversold zone.
  • In ranging markets, go short on bearish divergences, if the indicator’s first peak is in the overbought zone.
  • An uptrend can be confirmed using a trend following indicator. Go long when the momentum indicator turns up from below the center line. Exit using the trend following indicator. Divergences of the momentum and price in during the trend can be misleading.
  • A downtrend can be confirmed using a trend following indicator. Go short when the indicator turns down from above the center line. Exit using the trend following indicator. Divergences of the momentum and price in during the trend can be misleading.