Though they may initially appear similar, there are real differences that exist between the concepts of momentum and trend. They are two non-competing techniques aimed at identifying chances to buy on the upswing and sell on the downswing, serving to support or reject each other.
How Momentum Works in Technical Analysis
Naturally forward-looking, momentum investing and trading rely on the assumption that prices respond (at least in part) to the strength of their supply and demand inputs. Momentum takes many forms. It could be based on earnings reports for publicly-traded companies, the relationship between buyers and sellers in the market, or even the typical rate of historical price rises and falls. In a sense, momentum trading can be paradoxically concerned with the fundamentals of technical analysis.
Momentum doesn't have inherent quantitative qualities, so most momentum-based trading tools will use formulas to assign value to varying degrees of momentum. Many of these oscillators will further plot those values within a bounded range, allowing for inter-period comparisons between past and current momentum trends. In this way, momentum serves as the most common leading indicator in technical analysis.
How Trends Work in Technical Analysis
Naturally backward-looking, trend-following indicators are often less subjective and ambitious than momentum indicators. If momentum is fundamental and incidental, trends are big-picture and coincidental. Trends are not necessarily seen as causal, which might be the most basic distinction between the two.
The most common form of trend analysis is the moving average indicator. Moving averages are simply a visual representation of individual pieces of historical data that is blended together to look for meaningful patterns. That is not to say that trends cannot be predictive – rather that they lay the groundwork for other indicators, such as momentum oscillators, to build upon. They are the quintessential lagging tools.