What is Momentum indicator, the instructions of Momentum and how to use the Momentum indicator, the calculation of Momentum indicator and the Momentum indicator main parameters
The Momentum Technical Indicator measures the amount that a security’s price has changed over a given time span.
The Momentum indicator value is defined as the difference between price levels after a specified time period. If for example we take a period of 5, then the Momentum oscillator will be defined as the difference between the current close and the close 5 bars earlier. All negative and positive values are displayed on the chart with a zero line in the middle.
There are basically two ways to use the Momentum indicator:
You can use the Momentum indicator as a trend-following oscillator similar to the Moving Average Convergence/Divergence (MACD). Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term moving average of the indicator to determine when it is bottoming or peaking.
If the Momentum indicator reaches extremely high or low values (relative to its historical values), you should assume a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to begin to fall before selling).
You can also use the Momentum indicator as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). This is often the case, but it is also a broad generalization.
As a market peaks, the Momentum indicator will climb sharply and then fall off — diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.
Momentum is calculated as a ratio of today’s price to the price several (N) periods ago.
MOMENTUM = CLOSE(i)/CLOSE(i-N)*100
- CLOSE(i) — is the closing price of the current bar;
- CLOSE(i-N) — is the closing bar price N periods ago.
- if the indicator is below 100, then the market is bearish;
- if above 100 then the market is bullish;
- if the indicator is around 100, it signifies a flat market;
- bullish divergence / bearish convergence- the main signal of the weakness of the prevailing trend;
- in a flat market, exit from the overbought (oversold) areas is a signal to sell (buy).
Identifying divergences between price and technical indicators is important aspect of technical analysis trading.Bullish divergences can signal a trader to exit their short position; similarly, bearish divergences warn that prices could correct and it is advisable to exit any longs.
Bullish divergence / bearish convergence is the main Momentum signal
- Period: Period (amount of bars) for calculation of price changes, default is 14
- Apply to: Applied price
- Median Price, (high+low)/2
- Typical Price, (high+low+close)/3
- Weighted Close, (high+low+close+close)/4