Momentum measures the speed of price change and
provides a leading indicator of changes in trend.
- The Momentum line leads price action frequently enough to signal
a potential trend reversal in the market.
- Momentum indicators can warn of dormant strength or weakness in
the price well ahead of the turning point.
- At extreme positive values, momentum implies an overbought
position; at extreme negative values, an oversold position.
A strongly trending market acts like a pendulum; the
move begins at a fast pace, with strong momentum. It gradually slows
down, or loses momentum, stops, and reverses course.
The momentum line is always a step ahead of the price
movement. It leads the advance or decline in prices and levels off while
the current price trend is still in effect. It then begins to move in
the opposite direction as prices begin to level off.
The 10 day momentum line fluctuates on an open scale
around a zero line. When the latest closing price is higher than that of
10 days ago, a positive value is plotted above the zero line. If the
latest close is lower than 10 days previous, a negative value is
Ten days or periods are usually used in calculating
momentum, but any time period can be employed. The shorter the time
frame used the more sensitive momentum becomes to short term
fluctuations with more marked oscillations. Oscillator swings are
smoother and more stable when a longer number of days are used.
When an uptrending momentum line begins to flatten out
it means that the new gains being achieved by the latest closing prices
are the same as the gains 10 days earlier. The rate of upward momentum
has leveled off even though prices may still be advancing. When the
momentum line begins to drop further, below the zero line, the uptrend
in prices could still be in force, but the last price gains are less
than those of 10 days ago. The uptrend is losing momentum.
When the momentum line moves below the zero line, the
latest close is now under the close of 10 days ago and a short term
downtrend is in effect. As momentum continues to drop farther below the
zero line, the downtrend gains momentum. The downtrend decelerates when
the line begins to turn around.
If loss of momentum is experienced in a market at the
same time as selling resistance is met or when buying power is
temporarily exhausted, momentum and price peak simultaneously.
Momentum is a basic application of oscillator analysis,
designedto measure the rate of price change, not the actual price level.
Three common signals are generated by the momentum
oscillator: zero-line crossings, trendline violations, and extreme
Although the long-term price trend is still the
overriding consideration, a crossing above the zero line could be a buy
signal if the price trend is up and a crossing below the zero line, a
sell signal, if the price trend is down.
The trendlines on the momentum chart are broken sooner
than those on the price chart. The value of the momentum indicator is
that it turns sooner than the market itself, making it a leading
One of the benefits of oscillator analysis is being able
to determine when markets are in extreme areas. At extreme positive
values, momentum implies an overbought position; at extreme negative
values, an oversold position
The absence of a fixed upper and lower boundary presents
a difficulty with the momentum line. To help solve this problem look at
the long-term history of the momentum line and draw horizontal lines
along its upper and lower boundaries. Adjust these lines periodically,
especially after important trend changes.