Momentum was created by Welles Wilder and belongs to the most used indicators in Technical analysis. Momentum is used to measure the Strength and Speed of a Trend.
Its main advantage is simplicity of the construction. The formula looks like follows:
Price n – Price n-x
Price n = Actual price
Price n-x = Price n periods ago
Another possible way of its calculation is:
(Price n / Prce n-x) * 100
Most common settings are to 14 and 20 periods ago.
Positive values mean that the Actual price is higher than the price "n" days ago. If the Indicator value is positive, it means there is an Uptrend prevailing on the market. The Higher the indicator values are, the steeper increase and the stronger market Trend is. The analogy is true for decreasing Momentum values.
Momentum is displayed as a Histogram. Its value oscillates around Zero line (or around 100 line in the second way of calculation). It is also often smoothed by moving average, so it can be smoother and indicate clear signals to Buy and Sell.
Copyright © Picture made by Incredible Charts
We can use the Momentum indicator in several ways. The most common one is to Buy when the Momentum crossed its Zero line upwards (the trend is stronger and rising) and to Sell when the Momentum crossed Zero line downwards. The other possible ways of using it are as follows:
- searching for positive and negative divergences
- searching for Extreme values of the oscillator - Ups and Downs
- Momentum crossings with its Moving average. If it crosses upward, we Buy. If it crosses downwards, we Sell
- Momentum crossings with its Moving average (but just in a specified range). We buy if Momentum crosses its moving average upwards - just in the range below the Zero line. We Sell if Momentum crosses its moving average downwards, in the range above the Zero line.
Momentum is a very popular technique of trading. It is very simple to calculate and sometimes it can predict price reversals in advance.
Rate of change is just another variation of Momentum indicator.
Rate of Change (ROC)
Rate of change formula is as follows:
ROC = ((Price n – Price n-x) / (Price n-x)) * 100
Both indicators - (Momentum and Rate of Change) are almost identical and they are used in the same way, too.
If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.