Chapter 13

Measuring Momentum

In This Chapter

Figuring out what momentum means in trading

Going over the math and using momentum

Getting to know the relative strength index (RSI)

Introducing the stochastic oscillator

Momentum is the strength of the speed of a moving object. In this case, the “object” is the price of a security. Momentum is also a generic term covering a number of technical indicators, although many momentum indicators don’t use the word momentum in their names. In this chapter, I introduce you to some momentum indicators and give you tips on how to use them.

The terms momentum and rate of change are used interchangeably in technical analysis. The indicators look almost identical on a chart. Unless you plan to write formulas, the tiny differences don’t affect your analysis. I use the general term momentum throughout this chapter because it’s easier.

remember.eps In general, you can use momentum indicators to generate buy/sell signals or to evaluate buy/sell signals generated by other indicators. Momentum is a leading indicator and can be used to offset the lag inherent in trend-following indicators like moving averages. Momentum indicators excel at spotting an impending move when the market is moving sideways, and certain momentum measures are central to recognizing when a security is overbought or oversold. (See Chapter 2 for a discussion of overbought and oversold.)

Doing ...

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