Momentum indicator formula and settings: description, adjustment and application

Momentum indicator is the simplest trend-based indicator, a technical analysis tool.

Momentum indicates a change in the price of a trading instrument for a certain period of time. It can be applied as:

Oscillator, following the trend, similar to Moving Average Convergence/Divergence MACD. In this case, a trader gets a signal to buy if Momentum indicator falls and then goes upwards. A trader is supposed to sell, when Momentum indicator peaks and then goes downwards. To determine reversals of Momentum indicator more precisely, its short moving average can be used. Particularly high or low values of the indicator suggest that the trend will persist. If Momentum indicator hits very high values and then turns downwards, the price is likely to keep rising. However, a trader should take his/her time to open or close a position until the price confirms the signal.

Leading indicator. This way of use rests on the assumption that a sudden hike in the price is a precursor to an end of a bullish trend (as everyone believes it is to continue), while a sudden tumble bodes ill for a bearish trend (as everyone tries to quit the market). Basically, these two scenarios take place, yet such generalization is too wide. Once the market has closed in to its peak, Momentum shoots up. Then, it starts diving as the prices keep growing or stay flat. If the market has bottomed out, Momentum indicator sags only to reverse upwards long before the prices start to rise. In both cases, there is a gap between Momentum and the price levels.

Calculation

Momentum = CLOSE(i)/CLOSE(i-N)*100

CLOSE(i) – current bar’s closing price,

CLOSE(i-N) – closing price N bars earlier.