Momentum

This indictor is used to analysis how an instrument’s price changes over time, and the speed at which it changes at. When an instrument “gains momentum” it means it is goes in one direction.

The above methods are lagging indicators, however the indicator can be used as a leading one by assuming that when price increases rapidly then this is the market top (i.e. the trend will change), and where the price declines quickly then it has reached a market bottom (i.e. time to buy). This is, of course, not always the case.


Calculation

Momentum = (Today’s closing price) - (N periods ago’s closing price)
Rate of Change = Momentum x 100
(N periods ago’s closing price)

Signals

  • The indicator line crosses from below to above the zero line = buy. Note that the zero line is can also be shown as “100” in the chart, as shown in the example chart below.
  • The indicator line crosses from above to below the zero line = sell
  • The most extreme the indicator value, the stronger the trend
  • Trending-following. Buy when the indicator meets a low and then turns back up as this is a sign of a bullish trend to come, and when the indicator peaks and turns back down it’s time to sell.