The Momentum indicator is a centered oscillator that measures the rate of change of a security's closing prices, similar to the Price Rate-of-Change. Momentum compares a security's current price to its price at some point in the past. Most analysts recommend using a time period of 10 days.
Momentum can be used to show trends and their strength. When Momentum is positive, it means the current price is higher than its past price. Therefore, positive readings indicate uptrends and negative readings signify downtrends. Furthermore, high readings - whether positive or negative - generally indicate stronger trends, and low readings imply weak or weakening trends.
Because Momentum is a centered oscillator, its value fluctuates above and below a zero line. For some analysts, a Momentum line that crosses above or below the zero line can trigger buy and sell signals. As Momentum crosses the zero line from below, prices are forecasted to continue to rise. And, as Momentum crosses the zero line from above the opposite is true: prices are predicted to continue to fall.
Momentum can also be used to indicate overbought and oversold extremes. When momentum calculations reach extreme levels, it can be a sign that the market is overbought (high positive values) or oversold (high negative values).
Momentum generally moves before prices change and is therefore considered a leading indicator.
The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.