Trading Systems and Methods, 6th Edition

CHAPTER 9Momentum and Oscillators

The study of momentum and oscillators is the 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 usually found with a simple least squares regression (Figure 9.1), a straight-line fit through prices. The steeper the slope, the faster prices are rising. When today's momentum value is the same as the previous, prices are advancing or declining at the same rate; therefore, it is also called the rate of change (ROC).¹ Momentum is often considered using terms of Newton's Law, which can be restated loosely as once started, prices tend to remain in motion at about the same speed and in more-or-less the same direction.

Indicators of change, such as momentum and oscillators, are used as leading indicators of price direction. They can identify when the current trend is no longer maintaining its same level of strength; that is, prices are rising, but at a slower rate. This gives traders an opportunity to begin liquidating their open trend trades before prices reverse direction. As the time period for the momentum calculation shortens, this indicator becomes sensitive to small changes in price. It is often used in a countertrend, or mean reversion strategy to indicate overbought and oversold conditions. The change in momentum, also called acceleration, is even ...