Advanced Tools Plug-in:

MOM - Momentum Indicator

The momentum indicator describes how price changes occur. It is a measure of the price change. It lets you know if prices are increasing at a continuous rate or decreasing at a continuous rate. Momentum can help gauge the current market trend.

This indicator will sometimes shift ahead of a price change. It is both an indicator of trend as well as an indicator of a changing trend. The main thing to look for when using it is a divergence or difference between price behavior and the indicator’s behavior.

Momentum measures the rate of change in prices rather than actual price levels themselves. By measuring this rate of incline or decline, momentum tells whether the current trend is strengthening or weakening. If prices are rising and the momentum indicator is above the zero line, then the trend is gaining strength. If prices were rising but the indicator was sagging or went below the zero line, then we would interpret this as a sign of a coming change in trend. This is true because although prices were still increasing, they were doing so at a decreasing rate.

The reverse would be true during a declining market. For example, think of a race car gaining 20 miles an hour each lap, until it starts to only gain 15 miles an hour, then 10 mph, then 5 mph until eventually it reaches its top speed. Like a race car, a market can not sustain growing momentum forever, and in many occurrences momentum slows before prices change direction.

Typically, the trade signals are to buy when the momentum indicator crosses from below the zero line to above it. This indicates that a new upward trend has begun, as the market is able to violate resistance levels and continue higher with increasing speed.

The sell signal would be to sell when the line crosses from above the zero line to below it. This indicates that the market is picking up speed to the downside and should be able to violate support areas. It is in this way that this unique indicator is a trend following tool.

Another way to use momentum is to establish regions of overbought or oversold. For example, when, in a declining market, the prices continue downward and the momentum indicator moves toward more negative but begins to level out, we would be looking for a buy signal when the indicator turned upward and out of that oversold region. It is in this way that momentum can sometimes shift ahead of the price movement. This use of the momentum indicator is a counter trend usage.

In either implementation of this indicator the key is divergence: seeing momentum make lower highs while prices are making higher highs, or momentum making higher lows while prices are making lower lows. Being aware of a difference in price movement and the momentum level can help the trader make informed trading decisions.

Calculation

Parameters:   Period (20) - the number of bars, or period, used to calculate the study. You must determine a value suitable to your trading needs and methods. Some technicians argue that the length of the momentum indicator should equal the normal price cycle. The best method is to experiment with different lengths until you find the length that works best for that particular commodity you are trading.

Formula:

The general formula to calculate momentum is as follows:

MOMt = Pi - Pi-n

MOMt: The momentum indicator for the current period.

Pi: The price of the i interval.

Pin: The price n intervals ago.

n: The number of intervals or length specified.

Example: Assume the current price is 7470. This example examines a momentum study using a length of ten trading intervals. The price ten intervals ago is 7400. The calculation is:

MOM = 7470 - 7400 = +70

The momentum value can have a very broad range. It is a function of the length you select for the momentum and the volatility of the underlying futures contract. Thus, it could swing very widely and wildly about the zero line.

Buy/Sell Signals

Buy Signal happens when:

If we draw the MOM with the MOMMA Line: MOM value today is greater than Trigger value today AND MOM value yesterday is less than or equal to yesterdays Trigger value AND today’s Trigger is less than 0.

If we draw the MOM without the MOMMA Line: MOM value today is greater than 0 AND yesterdays MOM value is less than 0 AND MOM today is greater than or equal to Yesterdays MOM value.

Sell Signal happens when:

If we draw the MOM with the MOMMA Line: MOM value today is less than Trigger value today AND MOM value yesterday is greater than or equal to yesterdays Trigger value AND today’s Trigger is greater than 0.

If we draw the MOM with out the MOMMA Line: MOM value today is less than 0 AND yesterdays MOM value is greater than 0 AND MOM today is less than or equal to Yesterdays MOM value.