Understanding the Concept of Momentum
You can determine how quickly stock prices are changing by yourself using a momentum indicator line on a price chart. This indicator compares the most recent closing price to the previous closing price from any timeframe. Most often, the momentum indicator is displayed as a single line in a separate section of the chart from the price line or bars.
Using the Momentum Indicator in Trading
The momentum indicator can be used to provide trading signals, but it is best utilized to help confirm the validity of trades based on price movements such as breakouts or consolidations. There are several methods you can use to look at the indicator and determine the stock’s trend.
Crossing the 100 Line
Crossing the 100 line is one of the strategies traders use. When the price crosses above or below the 100 line (or the zero line if the indicator on the chart is based on the first type of calculation), it can indicate a buy signal if it’s above the line and a sell signal if it’s below. If the price exceeds the 100 line, the price starts to rise. Conversely, if it falls below the 100 line, the price decreases.
Crossovers
To buy or sell on a crossover, add a moving average line to your indicator. The moving average is the average closing price over a previous number of days that you specify.
Divergence
Positive divergence occurs when the price decreases but the lows in the momentum indicator are rising. This shows that while the price is falling, the selling momentum is slowing down. If you get a buy signal, this positive divergence can help confirm the signal.
Disclaimer Notes
The momentum indicator will not provide many signals beyond what can be seen just by looking at the price chart itself. If the price is moving rapidly upward, it will be visible on the price chart as well as the momentum indicator.
Frequently Asked Questions (FAQs)
What is the stochastic momentum indicator?
The stochastic momentum indicator is a variation of the stochastic indicator, which traders use to assess whether stocks are overbought or oversold. The readings range from -100 to 100, where 100 represents the most overbought condition.
What is the pressure momentum indicator?
The pressure momentum indicator, also known as “TTM squeeze,” is a measure of relative volatility. It is a combination of two other indicators: Bollinger Bands and Keltner Channels. When the Bollinger Band is inside the Keltner Channel, it represents a period of low volatility. By comparing volatility patterns and directional momentum, the pressure momentum indicator can help traders forecast sudden volatility in a certain direction.
Sources:
Fidelity. “Momentum.”
Corporate Finance Institute. “What are Momentum Indicators?”
Warrior Trading; “Momentum Indicator (MOM) Explained for Beginners.”
Source: https://www.thebalancemoney.com/how-to-trade-with-the-momentum-indicator-1031195
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