Momentum Stock Indices Analysis & Momentum Oscillator Signals

Momentum indicator uses math equations to calculate the line of plotting. Momentum measures the velocity with which stock price changes. This is calculated as a difference between the current stock price candle & the average stock price of a selected number of stock price bars ago.

Momentum represents the rate of change of the stock price over those specified time periods. The faster that stock prices rises, the bigger the increase in momentum. The faster that stock prices decline, the bigger the decrease in the momentum.

As the stock price movement starts slowing down the momentum will also start to slow down & return to a median level.

Momentum

Indices Analysis & Generating Signals

This technical indicator is used to generate technical buy and sell signals. The three most common methods of generating signals used in stock index trading are:

Zero Centerline Stock Indices Cross-overs Trade Signals:

• A buy signal is generated when Momentum crosses above zero
• A sell signal is 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 and oversold levels.

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

Trendline Break Outs:

Trend lines can be drawn on the Momentum indicator connecting the peaks and troughs. Momentum begins to turn before stock price thereby making it a leading indicator.

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

Technical Analysis in Stock Indices Trading