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Momentum (MOM)
Momentum monitors the change in prices. It tells you whether prices are increasing at an increasing rate or decreasing at a decreasing rate. Is the market trend about to change? Is the market overbought or oversold? Momentum may help you find those market conditions.
FutureSource calculates momentum by computing the continuous difference between prices at fixed intervals. That difference is either a positive or negative value. The software plots the differences about a zero line. When momentum is above the zero line and rising, prices are increasing at an increasing rate. If momentum is above the zero line but is declining, prices are still increasing but at a decreasing rate.
The opposite is true when momentum falls below the zero line. If momentum is falling and is below the zero line, prices are decreasing at an increasing rate. With momentum below the zero line and rising, prices are still declining but at a decreasing rate.
The normal trading rule is simple. Buy when the momentum line crosses from below the zero line to above. Sell when the momentum line crosses from above the zero line to below. Another possibility is to establish bands at each extreme of the momentum line. Initiate or change positions when the indicator enters either of those zones. You could modify that rule to enter a position only when the indicator reaches the overbought or oversold zone and then exits that zone.
FutureSource calculates momentum by computing the continuous difference between prices at fixed intervals. That difference is either a positive or negative value. The software plots the differences about a zero line. When momentum is above the zero line and rising, prices are increasing at an increasing rate. If momentum is above the zero line but is declining, prices are still increasing but at a decreasing rate.
The opposite is true when momentum falls below the zero line. If momentum is falling and is below the zero line, prices are decreasing at an increasing rate. With momentum below the zero line and rising, prices are still declining but at a decreasing rate.
The normal trading rule is simple. Buy when the momentum line crosses from below the zero line to above. Sell when the momentum line crosses from above the zero line to below. Another possibility is to establish bands at each extreme of the momentum line. Initiate or change positions when the indicator enters either of those zones. You could modify that rule to enter a position only when the indicator reaches the overbought or oversold zone and then exits that zone.
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 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.
Computation
The general formula to calculate momentum is as follows:
MOMt = Pi - Pi-nAssume the current price is 7470. This example examines a momentum study using a length of ten trading intervals. The price ten intervals ago was 7400. The calculation is:
- MOMt is the momentum indicator for the current period.
- Pi is the price of the i interval.
- Pin is the price n intervals ago.
- n is the number of intervals or length specified.
MOM = 7470 - 7400 = +70The 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.