Momentum is perhaps one of the easier oscillators to understand. It measures the speed of price changes. The Longman Dictionary of Contemporary English defines momentum as “the force gained by the movement or development of events.” In technical analysis, momentum is a technique of comparing prices at different times.
A price rise, or a price decline, from one day to the next day, is described as a one-day momentum. That is, today’s momentum is today’s close minus yesterday’s close.
A 10-day momentum means the comparison of today’s price to the price 10 days ago: Price [today] less Price [previous 10-day]. If today’s price is greater than the price 10 days ago, it will be a positive momentum, and if today’s price is less than the price 10 days ago, it will be a negative momentum. Momentum is also known as the rate of change of price.
Momentum oscillators include popular classics like Appel’s MACD Histogram, Stochastic, Wilder’s Relative Strength Index, and Williams %R. Momentum is useful in identifying early trend direction. Momentum has one powerful trait; it tracks how fast the price trend is moving, and gains or losses of speed. Unfortunately, momentum is sometimes not easy to identify because price and momentum do not always move in tandem.
If the price increases on a rally, the momentum becomes positive and rises with the price. However, when the price gets closer to its imminent peak or goes into a bracket market, the continuing rally in price will slow ...