The Momentum indicator is one of the simplest and most fundamental technical analysis tools. It measures the speed of price movement by comparing the current price to the price from a set number of periods ago, helping traders identify the strength of trends and potential reversal points.
What is the Momentum Indicator?
The Momentum indicator oscillates above and below a center line (either zero or 100, depending on the calculation method). It shows how fast prices are changing, which helps traders understand whether a trend is accelerating, steady, or slowing down.
Key concept: Momentum measures velocity, not direction. A rising price can have falling momentum if the rate of increase is slowing, which often precedes trend reversals.
Momentum Calculation
There are two common ways to calculate momentum:
Method 1: Price Difference
- Momentum = Current Close - Close N periods ago
This method oscillates around zero. Positive values indicate upward momentum.
Method 2: Price Ratio
- Momentum = (Current Close / Close N periods ago) x 100
This method oscillates around 100. Values above 100 indicate upward momentum.
Calculation Example
Stock XYZ prices:
Current close: $52
Close 10 days ago: $48
Method 1: Momentum = $52 - $48 = +$4
Method 2: Momentum = ($52 / $48) x 100 = 108.33
Both show positive momentum - prices are higher than 10 days ago.
Interpreting Momentum Values
Above the Center Line
- Current price is higher than N periods ago
- Bullish momentum is present
- Rising values indicate accelerating bullishness
- Falling values (but still positive) indicate decelerating bullishness
Below the Center Line
- Current price is lower than N periods ago
- Bearish momentum is present
- Falling values indicate accelerating bearishness
- Rising values (but still negative) indicate decelerating bearishness
Momentum Trading Strategies
1. Center Line Crossover
Trade momentum shifts:
- Buy signal: Momentum crosses above center line
- Sell signal: Momentum crosses below center line
- Best used with trend confirmation
Crossover Trade Example
Stock ABC has been declining. Momentum(14) is at -$2.50.
Price finds support and begins to rise.
Momentum crosses above zero, confirming the shift in velocity.
Enter long position with stop below recent support.
Monitor momentum for signs of deceleration to time exits.
2. Divergence Strategy
Spot early reversal signs:
Bullish Divergence
- Price makes a lower low
- Momentum makes a higher low
- Suggests selling pressure is weakening
- Potential bottom forming
Bearish Divergence
- Price makes a higher high
- Momentum makes a lower high
- Suggests buying pressure is weakening
- Potential top forming
3. Extreme Readings Strategy
Identify potential reversal zones:
- Define extreme levels based on historical readings
- Look for momentum to turn at these extremes
- Combine with support/resistance for confirmation
4. Trend Continuation Strategy
Trade with the trend using momentum:
- In uptrends, buy when momentum dips and turns up
- In downtrends, sell when momentum rallies and turns down
- Momentum staying above zero confirms uptrend health
Momentum and Price Action
Four Price-Momentum Scenarios
- Rising price + rising momentum: Strong uptrend, stay long
- Rising price + falling momentum: Trend weakening, prepare to exit
- Falling price + falling momentum: Strong downtrend, stay short or aside
- Falling price + rising momentum: Decline weakening, watch for reversal
Price-Momentum Analysis
Stock XYZ is in an uptrend, making new highs.
However, momentum has been making lower highs for three weeks.
This bearish divergence warns that the uptrend is losing steam.
Traders should tighten stops or take partial profits.
A break below key support could trigger a larger decline.
Momentum Period Settings
Short-term (5-10 periods)
- More responsive to recent price changes
- Better for day trading and scalping
- Generates more signals, including false ones
Medium-term (10-14 periods)
- Balanced responsiveness
- Standard setting for most traders
- Good for swing trading
Long-term (20-30 periods)
- Smoother readings, fewer signals
- Better for position trading
- Identifies major momentum shifts
Combining Momentum with Other Indicators
Momentum + Moving Averages
- Use MA to define trend direction
- Only take momentum buy signals when price above MA
- Add MA to momentum itself for smoother signals
Momentum + MACD
- MACD confirms momentum direction
- Both turning positive = stronger buy signal
- Divergences in both = higher probability reversal
Momentum + Volume
- Strong momentum + high volume = valid move
- Strong momentum + low volume = suspect move
- Volume confirms momentum signals
Momentum vs Rate of Change
- Momentum: Shows change in price points
- ROC: Shows change as percentage
- ROC is better for comparing across instruments
- Momentum is simpler and shows raw price change
Common Momentum Mistakes
- Using momentum signals without trend context
- Expecting immediate reversals from divergences
- Ignoring the difference between weakening and reversing momentum
- Not adjusting periods for different trading timeframes
Track Your Momentum Trades
Pro Trader Dashboard helps you analyze which momentum setups work best for your trading style.
Summary
The Momentum indicator provides a straightforward view of price velocity by comparing current prices to past prices. It helps traders identify trend strength, spot potential reversals through divergences, and time entries with trend continuation strategies. Remember that slowing momentum does not mean immediate reversal - it is an early warning that deserves attention. Combine momentum analysis with other technical tools and always consider the broader market context.
Learn more: Rate of Change and MACD indicator.