Momentum

Momentum indicator measures the speed of price change of an instrument

About Momentum

Momentum is an indicator that measures the speed of price change of an instrument. Momentum normally moves in the same direction as price. It is a very useful indicator for gauging market strengths and weaknesses.

When price rises sharply, momentum will increase sharply too. When price starts to slows down, momentum will also weaken and start leveling off. In a sideways market, falling momentum does not necessarily mean market is bearish and trend has changed from up to down.

Momentum indicator is not a standalone trading system. It should always be combined with other indicators.

Trading Application

Divergence

Bullish divergence occurs when prices fall and make new low but momentum does not fall or even rises.

Bearish divergence occurs when prices rise and make new high but momentum does not rise or even fall.

Center line crossover

BUY when momentum crosses above 100 line from below and SELL when momentum crosses below 100 line from above.

Please keep in mind that center line crossover is prone to whipsaws, i.e. momentum crosses above/below the 100 line only to come back below/above it.

Divergence

Red lines on the chart below depicts a bearish divergence condition where prices rose but not followed by RSI. Red circle (1) showed when the breakout occurred and price changed direction from up to down.

Blue lines on the chart depicts a bullish divergence condition where prices fell but not followed by RSI. Blue circle (2) showed when the breakout occurred and prices changed direction from down to up.

Center Line Crossover

Please keep in mind that center line crossover is prone to whipsaws where it would generate many buy and sell signals as shown on chart below (green box 1). It is better to only trade the signals that are in the direction of the current trend. For example, when the trend is up, we only trade the signals generated when momentum crosses above the center line.

The center line is also known as the zero line or 100-line, depending on how this indicator is calculated.

Blue arrows and red lines on the chart show when momentum crosses above center line from below. BUY at open of next bar/candle (blue arrows) with stop loss below the last low.

Red arrows and red lines on the chart show when momentum crosses below center line from above. SELL at open of next bar/candle (red arrows) with stop loss above the last high.

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