It is a technical indicator which measures the velocity or speed of price moving upward or downward. John J. Murphy explains momentum as “it is measured by taking the price variance for a fixed time interval. To make a 10-day momentum line, deduct the closing price ten days ago from the last closing price. The positive or negative value is then plotted around a zero line”.
Momentum measures the velocity of rising and fall in the price of the stock. From the trending point of view, momentum is a very suitable technical indicator for measuring the strength or weakness in the price of a stock. Times past has revealed that momentum is more valuable and useful during market rise than market fall that bull market tends to last longer than a bear market.
There is a variety of momentum indicators widely used by the traders to predict price change in stock. The relative strength index is one of the most popular momentum indicator widely used by forex traders. The RSI measures the price change and velocity at which price change. Indicator swings back and forth between 100 and zero. The rise in value above indicate uptrend momentum, value above 70 indicate overbought condition. Conversely, fall in value below 50 show downtrend, and a reading below 30 signify oversold.
The moving average convergence divergence is one of the most common and widely used momentum indicators. The MACD makes use of two moving averages, 12 days and 26 days exponential moving averages. The MACD line is obtained by subtracting the 26 days from 12 days. The signal line above the MACD line indicates uptrend while signal line below the MACD line indicates a downtrend.
The average directional index is another most popular momentum indicator created by Welles Wilder. It consists of plus directional indicator and minus directional indicator; it could be used to measure both price movement and momentum.
The momentum indicator is a vital financial market analysis tool for analysts and traders, rarely used in isolation. It is often used in conjunction with other technical indicators to reveal the best market trend. Once the market trend is determined, momentum is valuable because they indicate the strength of stock price.