Momentum 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 a difference between the current price candlestick and the average price of a chosen number of price bars ago.

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

As the price movement begins to slowdown the momentum will also begin to slowdown & return to a median area.

Momentum

Stocks Analysis & How to Generate Trade Signals

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

Zero Centerline Trading Crossovers Stock Trading Signals:

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

Oversold/Overbought Levels:

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

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

Stocks Trendline Break Outs:

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

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

Analysis in Stocks