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EABuilder Pro

Momentum

Introduction

Section titled “Introduction”

The Momentum Technical Indicator measures the change of price of a financial instrument over a given time span.

Usage of the Momentum Indicator

Section titled “Usage of the Momentum Indicator”

There are basically two ways to use the Momentum indicator:

  • As a trend-following oscillator, similar to the 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 (for example, if prices peak and turn down, wait for prices to begin to fall before selling).
  • 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.

Divergence at Market Peaks and Bottoms

Section titled “Divergence at Market Peaks and Bottoms”

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 stays above 100 while the price is higher than 14 bars earlier.

Calculation of Momentum

Section titled “Calculation of Momentum”

Momentum is calculated as a ratio of today’s price to the price several (N) periods ago:

MOMENTUM = CLOSE(i) / CLOSE(i - N) * 100

Where:

  • CLOSE(i) is the closing price of the current bar;
  • CLOSE(i - N) is the closing price N bars ago;
  • N is the indicator period.

A value above 100 means the price is higher than it was N bars ago; a value below 100 means it is lower.