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Momentum indicator

Any measure of the rate at which price is changing, as opposed to its level, used to judge whether a move is accelerating or fading.

A stochastic oscillator under a price chartA price line above a lower panel with a fast and a slow curve swinging between a line at 80 and a line at 20, and the point where the fast curve turns up through the slow one circled.PRICESTOCHASTIC (14, 3)80overbought20oversold%K%D%K crosses above %D
The stochastic oscillator. The stochastic shows where each close sits inside the recent high-to-low range, on a scale of 0 to 100. Readings above 80 mean closes are hugging the top of that range and below 20 the bottom; the circle marks the fast line turning up through the slow one.

The simplest version is rate-of-change: today's price divided by the price N bars ago. Everything from macd to true-strength-index is a smoothed or normalised variation on the same question.

Momentum has two distinct uses that are often confused. As a trend-confirmation tool it is used in the direction of the move: rising momentum supports continuation. As a reversal tool it is used through divergence, where price makes a new extreme and momentum does not.

Those uses can point opposite ways at the same time, which is why momentum readings are easy to rationalise after the fact. Decide in advance which use your system makes, and remember that momentum is computed from past prices and therefore lags. See indicator-lag.

Related: rate-of-change, divergence, macd, indicator-lag, oscillator

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