Momentum Indicators
Momentum Indicators
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Momentum 

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.

Momentum measures the rate at which stock prices rise or fall. From a trend perspective, momentum is a very useful indicator of the strength or weakness of the issue price. History shows us that momentum is much more useful during rising markets than during declining markets; The reason for this is that markets grow more often than they fall. That is to say, bull markets tend to last longer than bear markets.
 
In technical analysis, momentum and rate of change (ROC) are the two most commonly used terms. They can be simply defined as technical indicators that show the difference between today’s closing price and the close a certain number of days ago. Momentum thus, is simply the price difference (change) over a given time period.
 

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:

  1. Trend following indicators, also known as Lagging Indicators, and
  2. Oscillators, also known as Leading Indicators.
Indicators are used to develop buy and sell signals with:
  1. Crossovers, 
  2. Oversold and Overbought conditions, and
  3. Divergence
Momentum indicators are not infallible. Even though the buy and sell signals generated by the indicators may seen clear and perhaps, such signals should be interpreted in confirmation with other technical analysis tools. An indicator may flash a buy signal but if the chart pattern shows a descending  triangle with a series of declining peaks, it may well be a false signal.
 
Momentum typically reverses along with the price – though the latter may do so with a small time interval. 
 
Common momentum indicators include the 
  1. Moving averages (MA), 
  2. Relative Strength Index (RSI), 
  3. Rate of Change (ROC), 
  4. Stochastic, and 
  5. Moving Average Convergence Divergence (MACD).

All these indicators have some common characteristics but differ from each other in another aspects. 

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