Momentum
Type
Momentum oscillator
Short introduction
The momentum in the group of oscillators is certainly the most important and worldwide most widely used oscillator in this group of indicators. The calculation is trivial, but its many variations make it useful in many cases. The common abbreviation is "MOM".
Statement
The momentum tries to measure the force of a price movement by simply subtracting the price of a few days ago from the current price. Thus, the indicator oscillates around the zero line. The purpose of this subtraction is to identify new trends, which often try to establish themselves through large price movements. In the course of the trend, the power, and thus the absolute value of the momentum, often diminishes.
Instead of subtracting the prices, you can also divide the two prices, the statement remains identical, only the baseline changes from 0 (zero) to 100.
Formula/calculation
MOM = Ct - Ct-n+1
or:
MOM = (Ct ÷ Ct-n+1) × 100
Interpretation
The momentum offers many possibilities for interpretation. Below, you find the principles on which you can base your own individual strategies.
A momentum always indicates a downward trend. If the momentum drops further, then the force of the downward movement also increases. A rising momentum below the zero line indicates a weakening of the downtrend, thus indicating a possible new uptrend.
A positive momentum indicates an uptrend in the underlying security, a rising momentum in this range continues to indicate a strengthening of the uptrend. If the momentum falls, the upward trend could soon come to an end.
The "classic" signal is provided by the breakthrough of the centre line. A crossing up through this line may be used as a signal to buy, a crossing down through this line as a signal to sell. To avoid false signals, you can also draw two auxiliary lines upwards or downwards. In this case, a signal should only be considered if one of these auxiliary lines is breached.
Default setting
- Depending on the application, the default settings for momentum are very different, but common values are 10 or 25 days.