New Trading Systems and Methods, Fourth Edition

CHAPTER 9

Momentum and Oscillators

The study of momentum and oscillators is an analysis of price changes rather than price levels. Among technicians, momentum establishes the speed of price movement and the rate of ascent or descent. Analysts use momentum interchangeably with slope, the angle of inclination of price movement as measured using a straight line for the price movement and a horizontal line representing time (Figure 9.1). Momentum is also thought of as force or impact; it is often considered using terms of Newton's Law, which can be restated loosely as once started, prices tend to remain in motion in a somewhat straight line.

Indicators of change, such as momentum and oscillators, are used as leading indicators of price change. They can identify when the current trend is no longer maintaining its same level of strength, that is, they show when an upwards move is decelerating. Prices are rising, but at a slower rate. This gives traders an opportunity to begin liquidating their open trend trades before prices actually reverse. As the time period for the momentum calculation shortens, this indicator becomes more sensitive to small changes in price. It may be interpreted as a countertrend method. The change in momentum, also called rate of change or acceleration, is even more sensitive and anticipates change sooner.

Before beginning a discussion of various momentum calculations, a brief comment on terminology is necessary to understand how various techniques are grouped ...