Momentum's Leading Edge
To recap, the first thing you should assess when studying a price chart initially is the trend structure. This can be done objectively via the Pure Price Method or the Moving Average Method, preferably in conjunction. Once you establish that price is in a rising or falling trend, the second step is to assess the magnitude or power of that trend. To do this, you'll need the leading edge that momentum can give you, both to identify confirmations in the early stages of a trend and non-confirmations in the form of momentum divergences as the trend matures in its latter stages. In this way, momentum provides two benefits to your analysis, first in confirming the health of a new trend in development, and second in assessing the likely end of a mature trend via divergences in advance of the official but delayed signal the Pure Price and Moving Average methods reveal to you.
That's not all momentum can do for you—the momentum helps you set specific trades, namely the impulse-related trade setups like flags and Impulse Buy setups we discuss in Chapters 9 and 10. In this chapter, you will learn how to interpret the momentum conditions of a price move, identify momentum bursts as confirmations of early trends, and locate divergences as early warning signals that a mature trend is showing signs of a potential future reversal.
THE SCIENCE OF MOMENTUM
Before we examine how to apply the concept of momentum to our price charts, we first need to define momentum ...