Momentum

All oscillators are based to some degree on the concept of momentum. As momentum increases the oscillator accelerates in the direction of the movement. As the momentum decreases the oscillator slows in the direction of the movement. Momentum measures the rates of change in the trend.

The actual reading of momentum is based on comparing the latest closing price to the closing price several periods ago. When closing prices are higher a positive value is charted. Prices must rise while the momentum line is positive at an increasing rate, for the momentum line to continue rising. This means the uptrend must be accelerating for the momentum line to rise. Gains must be higher than gains previously to continue the increase in the momentum line. When the line flattens, momentum has slowed, even if price action still moves in the same direction. When the momentum line begins falling, momentum is actively decreasing and price may begin moving in a bearish direction.

When closing prices are lower a negative value is charted. For the momentum line to continuously fall, prices must fall at an increasing rate. The momentum line will only continue to decrease as prices fall faster in a downtrend. Losses must be higher than losses previously to continue the decline. The line flattens when momentum slows, but price can continue moving in the same direction. The line will rise when downwards momentum beings decreasing and turns in a bearish direction.

The amount of days is determined by the setting. Shorter periods are more sensitive to change, making the momentum indicator more volatile. Longer periods are less sensitive to change, smoothing the momentum indicator line.

The crossing of the zero line is often seen as a signal to trade. A cross up indicates a buy when it accompanies an uptrend. A cross down indicates a sell, but only if its accompanied by a downtrend. This is generally a lagging signal, and it must be taken with a trend.