Description
Momentum measures the velocity of price changes as opposed to the actual price levels themselves. Momentum is measured by continually taking price differences for a fixed time period. To create a 10 day period momentum line you would subtract the closing price from 10 days ago from the last closing price. This result is then plotted around a zero line. A momentum value above zero indicates that prices are moving up, and below zero indicates moving down.
How this indicator works
- Since the Momentum indicator does not have an upper and lower boundary you must visually inspect the history of the momentum line and draw horizontal lines along its upper and lower boundaries. When the momentum line reaches these levels it may indicate that the stock may be overbought or oversold.
Note: Momentum is an unbound oscillator, meaning there is no upside or downside limits. This makes interpreting an overbought or oversold condition subjective. When the Momentum indicator is overbought the security can continue to move higher. When the Momentum indicator is oversold the security can continue lower as well. Use the Momentum indicator in conjunction with additional indicators or price analysis when attempting to read overbought or oversold conditions. - Crossing above the zero line during an uptrend would be a buy signal and a crossing below the zero line during a downtrend would be a sell short signal. When using these signals users generally trade in the direction of the overall trend.
- If underlying prices make a new high or low that isn't confirmed by the Momentum Indicator, the divergence may signal a price reversal.
Calculation
Momentum = Price today - Price n periods ago
Typically, the closing value of the Price Series is used.