Chapter 13

Measuring Momentum

IN THIS CHAPTER

Bullet Figuring out what momentum means in trading

Bullet Going over the math

Bullet Getting to know the relative strength index (RSI)

Bullet Introducing the stochastic oscillator

One of the biggest problems in technical analysis is detecting when a trend is about to end rather than just putting in a minor pullback. Momentum is the single best tool for doing that. Momentum is the speed of a price change and it's just about the easiest indicator of all — you divide today’s price by the price x number of days ago. Over time, if the price is rising at a good clip, the momentum number keeps getting bigger, and so a graphic representation on the chart shows a rising line. Momentum refers to the change in the price level rather than the level itself. Arithmetically, prices can still be rising but if they’re rising at a slower pace, the line flattens out. When prices start falling, the momentum number gets smaller and smaller, and so the line on the chart is a falling line.

That’s basic momentum. But it gets more complicated than the original simple formula. For one thing, ...

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