✔️ Information reviewed and updated in December 2023 by Eduardo López
If you are interested in starting forex or stocks trading, it may be helpful for you to use technical analysis in your strategies. And, as technical analysis we refer to trading indicators as Momentum, which are mathematical calculations that are represented by lines on a graph.
These indicators help traders to identify signals and trends within the market. A leading indicator observes a forecast signal that predicts future movements of variables such as prices, and a lagging indicator observes past trends.
In this article, we will tell you more about the momentum indicator. This indicator is very reliable for traders who use technical analysis to detect trend reversals.
➡Definition of the Momentum Indicator
Momentum is a technical indicator of the oscillator family, which turns out to be very effective when used in trading strategies. This indicator measures the speed of changes in market prices during a fixed period of time.
In addition, it helps the operator to evaluate the strength of a movement or trend to make better decisions, since it identifies when the price of a financial instrument rises or falls, and with what force it does so.
➡How do you get Momentum?
It is possible to identify the strength of a price movement using this indicator on a trading chart. Its formula compares the closing price of the recent period (CA) with the previous closing price (CP), regardless of the time horizon.
The only calculation that has to be done is as we mentioned above, you only have to make a division between the current closing price over the previous closing price, and multiplying that result by 100.
Being an oscillating technical indicator, it varies between the value of 100. This depends on whether the recent closing price is higher or lower than the closing price of the previous period.
➡How is it interpreted?
An uptrend is achieved when the price curve reaches a new low, while the indicator remains above its previous low. On the contrary, a downtrend is obtained when the curve reaches a new high, while the indicator remains below its previous high.
The levels of the Momentum indicator are as follows:
- When the indicator is greater than 100, the price is greater than the price of “n” periods ago.
- When the indicator is less than 100, the price is less than the price of “n” periods ago.
This means that the distance the indicator is above or below 100 shows the speed at which prices are moving. When the indicator moves above 100, it means that it is an uptrend. On the contrary, if the indicator moves below 100 it means that it is a downtrend.
Actually, the interpretation is quite easy, since everything rotates in relation to axis 100. Also, Momentum trading indicates the strength of the trend.