A:

One of the main goals of every trader using technical analysis is to measure the strength of an asset's momentum and the likelihood that it will continue. This is the primary purpose of indicators such as the moving average convergence divergence (MACD), stochastics, price rate of change (ROC) and the relative strength index (RSI). (To learn more about these indicators, see the series Getting To Know Oscillators.)
Most of the indicators used to measure momentum are interpreted by using certain values that suggest the asset may be getting overbought or oversold. The strength of current momentum is considered to be getting weaker when indicators such as the ones mentioned above have values that demonstrate overbought or oversold conditions. For example, many traders suggest that an asset with an RSI below 30 or a stochastic value below 20 may experience a reduction in the amount of downward momentum and is a likely candidate for a reversal.

You may notice that many momentum indicators are bound between two extreme levels, usually 0 to 100 or -100 to +100. This is important because a cross through the center line of the indicator is interpreted to mean that momentum is either increasing or decreasing, depending on the direction. For example, momentum is said to be increasing when the ROC indicator crosses above the 0 line, and decreasing when it crosses down through 0.

In addition to the methods we've already mentioned, traders can also monitor the crossing of certain moving averages to confirm the strength of a price move. Momentum is said to be increasing when a short-term average crosses above a longer-term average. This is the premise behind the MACD indicator, which uses a 12-day exponential moving average and a 26-day EMA. When this indicator has a value greater than 0, it means that the shorter-term average is above the longer-term average, and it may suggest that momentum is increasing.

To learn more about momentum trading, see Introduction To Types Of Trading: Momentum Traders and Momentum Trading With Discipline.

RELATED FAQS
  1. What are the best technical indicators that complement the Relative Strength Index ...

    Learn some of the best additional technical indicators that can be used along with the relative strength index to anticipate ... Read Answer >>
  2. What are the most common momentum oscillators used in forex trading?

    Explore two frequently used momentum indicators in forex trading, the moving average convergence divergence, or MACD, and ... Read Answer >>
  3. How are moving averages used in trading?

    Moving averages are very popular tools used by technical traders to measure momentum. The main purpose of these averages ... Read Answer >>
  4. Why is the Moving Average Convergence Divergence (MACD) important for traders and ...

    Take a look inside one of the most popular and widely trusted technical indicators, the moving average convergence divergence, ... Read Answer >>
  5. What are the best technical indicators that complement the Price Rate Of Change (ROC)?

    Explore some of the best technical indicators, such as moving averages, that complement trading strategies using the price ... Read Answer >>
  6. What are the best technical indicators to complement the Dynamic Momentum Index?

    Use other technical indicators to complement the use of the dynamic momentum index in analyzing a market and determining ... Read Answer >>
Related Articles
  1. Trading

    A Primer On The MACD

    Learn to trade in the direction of short-term momentum.
  2. Financial Advisor

    Moving Average Convergence Divergence - MACD

    Learn about this momentum indicator that shows the relationship between two moving averages.
  3. Investing

    The Top Technical Indicators For Commodities Investing

    Traders can use "the usual suspects" (standard indicators for trend trading) when it comes to choosing indicators for investing in commodities. Here's how.
  4. Trading

    MACD And Stochastic: A Double-Cross Strategy

    Two indicators are usually better than one. Find out how this pairing can enhance your trading.
  5. Financial Advisor

    Relative Strength Index (RSI)

    Learn more about this technical momentum indicator that determines whether an asset is overbought or oversold.
  6. Trading

    MACD And Stochastic: A Double-Cross Strategy

    The stochastic oscillator and the moving average convergence divergence (MACD) are two indicators that work well together.
  7. Trading

    Spotting Trend Reversals With MACD

    Knowing when trends are about to reverse is tricky business, but the MACD can help.
  8. Trading

    Forex: Keep An Eye On Momentum

    Using the simple MACD histogram could change how forex traders analyze currency pairs for good.
  9. Trading

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
RELATED TERMS
  1. Price Rate Of Change - ROC

    A technical indicator that measures the percentage change between ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following ...
  3. Dynamic Momentum Index

    An indicator used in technical analysis that determines overbought ...
  4. True Strength Index - TSI

    A technical momentum indicator that helps traders determine overbought ...
  5. Momentum

    The rate of acceleration of a security's price or volume. The ...
  6. Disparity Index

    A technical indicator that measures the relative position of ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  5. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  6. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
Trading Center