Markets in Motion: Momentum Analysis Assumes the Current Velocity of Price Change Offers Insight into the Future Direction of Price Change. Several Tools Measure These Changes and Suggest Ways You Can Position Your Trading Capital to Take Advantage of Those Changes
Holter, James T., Futures (Cedar Falls, IA)
Trading has many big questions, and one of the biggest is this: When a market is moving in a particular direction, is it more likely to keep moving in that direction, or is it poised to exhaust its momentum and turn or stall?
Momentum indicators, which measure the velocity of price changes and not necessarily the direction of price changes, dare traders to ask themselves that question constantly. That is, when the momentum indicator reports that prices are moving higher at an exceedingly faster rate, do you buy to go with the flow, or do you offset your longs or even sell on the assumption the market can't maintain such a high rate of change?
These indicators are typically displayed as oscillating lines beneath a price chart. As such, they often are referred to, in general, as oscillators. For most oscillators, positive values reflect rising prices and negative values reflect falling prices. The higher the positive value, the faster price is rising. The lower the negative value, the faster price is falling. Values near zero indicate the market is stagnant.
There are dozens of momentum indicators. However, they are all similar, with minor tweaks or twists. If you're new to them, however, it's sufficient to start with three: rate of change, stochastics and the relative strength index (RSI).
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Publication information: Article title: Markets in Motion: Momentum Analysis Assumes the Current Velocity of Price Change Offers Insight into the Future Direction of Price Change. Several Tools Measure These Changes and Suggest Ways You Can Position Your Trading Capital to Take Advantage of Those Changes. Contributors: Holter, James T. - Author. Magazine title: Futures (Cedar Falls, IA). Volume: 38. Issue: 10 Publication date: October 2009. Page number: 60+. © 2009 Summit Business Media. COPYRIGHT 2009 Gale Group.