Home > Technical analysis > Indicators and oscillators > Momentum
The Momentum indicator calculates the value of the commodity price shifts during a definite period of time.
The main ways of using this indicator are the following:
Momentum is used as a leading indicator. This tool uses the notion that as a rule the last phase of upward tendency is followed by absolute price increase because everyone is sure that it will go on. In its turn, the closing of the bears' market is usually followed by absolute decrease in prices because everyone seeks after leaving the market. This is a rather usual situation in the market but it is important to understand that still it is quite a general conclusion.
Like MACD, Momentum is used as an oscillator following the tendency. In this situation of usage, if the indicator makes trough and begins to grow, the signal to purchase is sent; if it comes up to its high and turns downwards, the signal to sell is sent. It is worth using its short moving average to determine the indicator's turning points.
Momentum calculates the currency's rate-of-change, being a leading indicator. The current plot forms an oscillator that shifts above and below 100. Bearish and bullish interpretations are found by seeking discrepancies, extreme readings, and centerline crossovers.
The momentum can be of either positive or negative values. The prices fall if the current price of closing is less than the price of closing of days back so. Negative values of momentum mean that the current price of closing is higher than the price of closing or days back, and that is why the prices grow if Momentum is of the positive value.
The absolute value of Momentum characterizes the velocity of movement of the prices; the large absolute value of Momentum means fast movement of the prices.
About a zero point, the chart of the Momentum shifts. If the chart crosses the zero line, it means changing of direction of shift, which means that the market has lost the moment of movement. The price still can grow, when the Moment already will reach the zero point. After crossing a zero line, the movement below zero is signal to sale; above zero means a signal to purchase.
A definite investing or trading style is also characterized by Momentum. The rational is that the hot get hotter and the cold get colder. Bullish momentum players purchase currency pairs or commodities that are popular or that they think are going to be popular. At last, popularity grows, the advance will quicken. Price acceleration resembles an increase in momentum.