Momentum Technical Analysis & Momentum Oscillator Signals

The momentum indicator uses math equations to calculate line of plotting. Momentum measures the velocity with which price changes. This is calculated as the difference between the ruling stock price candle and the average trading price of a chosen number of price bars ago.

Momentum represents the rate of change of the price over the particular time periods. The faster that prices rises, the larger the increase in momentum. The faster that prices decline, the larger the decrease in momentum.

As the price movement begins to slowdown the momentum also will begin to slowdown and return to a median zone.

Momentum

Technical Analysis and How to Generate Signals

This indicator is used to generate technical buy and sell signals. The 3 most common techniques of generating signals used in indices trading are:

Zero Centerline Trading Cross Overs Stock Trade Signals:

• A buy signal gets generated when Momentum crosses above zero
• A sell signal gets generated when Momentum crosses below zero

Overbought/Oversold Levels:

Momentum is used as an overbought/oversold indicator, to identify potential overbought & oversold levels based on previous readings: the previous high or low of the momentum is used to figure out the overbought & oversold levels.

• Readings above the overbought level mean indices is overbought and a price correction is pending
• While readings below the oversold level the price is oversold & a price rally is pending.

Trend Line Break Outs:

Trendlines can be drawn on the Momentum indicator connecting the peaks & troughs. Momentum begins to turn before trading price therefore making it a leading indicator.

• Bullish reversal - Momentum readings breaking above a downward trend line warns of a possible bullish reversal signal while
• Bearish reversal - momentum readings breaking below an upward trend line warns of a possible bearish reversal trading signal.

Technical Analysis in Indices Trading