Getting to Know Momentum
Many investors will confuse a trendline with momentum. However, as an event derived from astute technical analysis, Momentum tells investors a lot more than a cursory glance at a security price's trend line. Using technical analysis and technical events like Momentum, investors are able to determine whether a price is likely to continue its trend or reverse and head the other way.
Defining Momentum Sharing similarities with the Moving Average Convergence-Divergence (MACD), Momentum tells investors how much a security's price has changed over a certain time period. Investors with a general understanding of technical analysis methods, and this method in particular, will be able to more accurately determine whether day-to-day changes in price are merely a reflection of a market's systemic behavior or if it is signaling a more permanent trend.
Put another way, Momentum gives investors insight into the underlying price trend. When using technical analysis tools in this manner, investors should be able to better identify whether a particular security is overbought or oversold and make changes to their positions accordingly. Decisions like these are impossible to make when based entirely on security prices.
Figuring Out Momentum When it comes to completing your own technical analysis, you may encounter difficulty or frustration with the sometimes complicated mathematical formula. Luckily with Momentum, the calculation is rather simple. To obtain a Momentum reading, you take the closing price of a security, divide it into the closing price from ten periods ago, and multiply it by 100. In other words: Close $ /(Close 10 time-periods ago) * 100].
Using Momentum To Make Trade Decisions For help deciding on a Momentum-based trade, the investor must simply determine whether the Momentum value is greater than or less than zero. For amounts higher than zero, the a bullish signal is triggered and for amounts less than zero, a bearish signal is triggered. As a caveat, investors also need to understand that progressively higher low values might suggest a continuation of an existing trend and not a reversal. In most instances, investors should only execute a trade if the price itself turns around (e.g. on a sell, don't sell based on Momentum, but sell when the price begins to fall).
As with most technical analysis, investors should never base entry or exit points solely on Momentum. In many cases, Momentum can serve as confirmation of other technical events or even underlying security fundamentals.
Despite Momentum being a fairly simple even to calculate, combining it with a dozen or more other events can become burdensome. Most investors rely on trading software to calculate buying opportunities based on technical analysis. Some trading software will even make simple buy and sell recommendations. While understanding technical analysis is important, completing the work yourself is not.
Article Source: FxTradingStock.com
About the Author
Chris has more than 16 years of financial services experience. As the Fund Adviser for the MutualFundSite.org, he recommends Balanced Funds as a starting point for people who want to know Where To Invest 10,000.
by: Chris Blanchet
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Word Count: 470
Date: Mon, 18 Jan 2010
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