Overview
Momentum is perhaps the simplest and easiest oscillator to understand and use; it is the measurement of the speed or velocity of price changes. In "Technical Analysis of the Financial Markets", John J. Murphy explains:
"Market momentum is measured by continually taking price differences for a fixed time interval. To construct a 10-day momentum line, simply subtract the closing price 10 days ago from the last closing price. This positive or negative value is then plotted around a zero line.
KEY TAKEAWAYS
- Momentum is the speed or velocity of price changes in a stock, security, or tradable instrument.
- Momentum shows the rate of change in price movement over a period of time to help investors determine the strength of a trend.
- Investors use momentum to trade stocks whereby a stock can exhibit bullish momentum–the price is rising–or bearish momentum–the price is falling.
Description
Momentum measures the rate of the rise or fall in stock prices. From the standpoint of trending, momentum is a very useful indicator of strength or weakness in the issue's price. History has shown us that momentum is far more useful during rising markets than during falling markets; the fact that markets rise more often than they fall is the reason for this. In other words, bull markets tend to last longer than bear markets.
Technicians use a 10-day time frame when measuring momentum. You will see the zero line in the chart below. If the most recent closing price of the stock is more than the closing price 10 trading days ago, the positive number (from the equation) is plotted above the zero line. Conversely, if the latest closing price is lower than the closing price 10 days ago, the negative measurement is plotted below the zero line.
To find out more about this indicator and it`s trading signals click here.
Settings in the chart
Settings in Strategies
Momentum can be used both separately and together with other indicators in the Strategy Builder.