MOMENTUM

Momentum measures the change in price with time. Momentum is calculated by taking the difference in price of the two time periods, as shown in the formula:

 

Momentum i = Pi - Pi - t

where P = price of future

= specific time period

= number of time periods in the past

 

The momentum value is used in a similar way as other oscillators. Momentum can identify oversold and overbought areas, and can also be employed as an indicator to go long or short the market when the value crosses the zero line.

The momentum value provides an indication of the rate of change in the market. A large positive change in the momentum value means the market is rapidly moving higher, which may imply there is good internal strength to the market. A large negative change in the momentum value means the market is rapidly moving lower, which may imply there is much internal weakness in the market.

The strong up move is confirmed by the high momentum readings. The market takes a swift drop, which is reflected in the momentum values. A slower move higher develops, so the momentum values take on less extreme values.