Momentum is the rate or rate of change in the price of a stock, a security, or a traded instrument. Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend. Stocks that tend to move with momentum are called momentum stocks.
Investors use momentum to trade stocks in an uptrend by going long (or buying stocks) and going short (or selling stocks) in a downtrend. In other words, a stock can exhibit bullish momentum, meaning that the price is rising, or bearish momentum when the price is falling steadily.
Using Momentum in Combination with a Chart Patterns
Momentum can be defined as the strength or sustainability of a market move as measured by both volume and price. Momentum is a most commonly used but not very well understood word by market traders. It is the velocity of a trend or a price move. As a technical analyst, our first purpose is to determine the ongoing trend. Once the trend is known, we should then be able to successfully trade the trend in order to maximize profits and to keep the cash register ringing.
Another use of the indicators is to try and determine when the trend may change, based on watching a combination of volume, price, and other indicators. Clearly, this can not always be accurately achieved because the trend can change according to the mood of the market but being aware of market statistics, positions of other traders, or any other significant change in the markets is always of benefit.
Momentum indicators are technical analysis tools used to determine the strength or weakness of a stock price. Momentum measures how quickly stock prices rise or fall.
Different Markets, Different Indicators
Momentum indicators can broadly be classified as:
- Trend following indicators, also known as Lagging Indicators, and
- Oscillators, also known as Leading Indicators.
- Oversold and Overbought conditions, and
- Moving averages (MA),
- Relative Strength Index (RSI),
- Rate of Change (ROC),
- Stochastic, and
- Moving Average Convergence Divergence (MACD).
All these indicators have some common characteristics but differ from each other in another aspects.