Momentum Indicator

The Momentum is a technical Indicator that measures the amount that a price of security has changed over a given time span.

Here are the ways you may use the Momentum indicator:

–          The Momentum indicator is actually a trend-followingoscillator, having the same options as the Moving Average Convergence/Divergence (MACD). You can buy when the indicator bottoms and turns up, or you may sell when the indicator peaks and turns down.

If the Momentum indicator reaches extremely high or low values, you should assume a continuation of the current trend. For instance, if the Momentum indicator reaches extremely high values and then turns down, you should know that prices are likely go still higher. Otherwise, trade only after prices confirm the signal generated by the indicator.

–          Besides, the Momentum indicator could be used as a leading indicator. This method includes the idea that market tops are typically identified by a rapid price increase and that market bottoms usually end with rapid price declines.

momentum
Momentum Indicator

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. In a similar way, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. These two situations result in divergences between the indicator and prices.

The calculation of the indicator is the following ->MOMENTUM = CLOSE(i)/CLOSE(i-N)*100

Where:
CLOSE(i)  is the closing price of the current bar and CLOSE(i-N) is the closing bar price N periods ago.

The Momentum indicator is also similar to Rate of change (ROC) indicator. It also shows the difference between today’s closing price and the close N days ago.

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