Momentum

What

The momentum indicator is one of the simplest technical analysis equations available. It is a calculation of the difference between the current market price of a share (or other instrument) and the price of the same share a certain number of days ago.

How

M = P(n) - P(n-t)

where n is the current period

and t is a parameter determined by the user, the default is 10.

When

You can 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.

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.