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Momentum Oscillator

The Momentum indicator measures the amount that a price has changed over a given time span. It displays the rate-of-change of a price as a ratio. The momentum oscillator measures the velocity of directional price movement. When price moves up, at some point the market is considered to be overbought; when it moves down, at some point the market is considered to be oversold.  In either case, a reaction or reversal is imminent.  The slope of the momentum oscillator is directly proportional to the velocity of the move.  The distance traveled up or down by the momentum oscillator is proportional to the magnitude of the move.  The momentum oscillator is usually characterized by a line on a chart drawn in two dimensions. The Y axis (vertical) represents magnitude or distance the indicator moves; the X axis (horizontal) represents time. The momentum oscillator drawn in this manner is characterized by the fact that it moves very rapidly at market turning points and tends to slow down as the market continues the directional move. 




It is used as a trend-following oscillator. Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term (e.g., 9-period) moving average of the indicator to determine when it is bottoming or peaking. It is also used as a leading indicator.


This method assumes that market tops are typically identified by a rapid price increase and that market bottoms typically end with rapid price declines. As a market peaks, the Momentum indicator will climb sharply and then fall off diverging from the continued upward or sideways movement of the price.

Momentum Oscillator
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