Momentum, generally speaking, is the speed or force of movement, usually gauged in rate. On the other hand, as used in the world of trading and investment, refers to the acceleration rate of a security’s volume or price. In the field of technical analysis, however, momentum is referred to as an oscillator and is often used in identifying trend lines. In simple terms, momentum is the rate of change on the movement of price for a specific asset.
There are some tools that investors use to help in defining the trend, usually called as the momentum indicator. These indicators typically include a trend line, which is a line that is drawn from the higher price to the lower rate, or even vice versa, through a given period.
If the line goes up, the trend is also up, and the investor can decide to buy the stock. On the other hand, if the line is down, the trend also goes down, which means that it is time for an investor to sell stocks. Even though momentum refers to fundamental performance measures, including earnings and revenue, it is also used about asset prices as a momentum indicator.
To track the momentum of a particular asset, a momentum indicator can be used. What is the momentum indicator, you may ask? Different indicators are used in the market these days. Generally speaking, a momentum indicator serves as an oscillator. Resulting curve tends to fluctuate between the values because of this.
The momentum indicator often includes a single fluctuating curve. Occasionally, traders add a smoothed moving average, otherwise known as SMA, in order to improve the value of the signals in trading. The SMA is usually attached to the chart, typically colored in red, while Blue represents the real momentum. This momentum indicator serves as an appropriate gauge for market strength.
So, how to use the momentum indicator? These indicators work by spotting trends right after being established even at the expense of any late entry. Another bright side to this is that there are generally fewer chances of committing mistakes in identifying the rates and fluctuations. However, as there are different types of momentum indicators, it is imperative to determine which one works best for you as an investor. There are also other aspects involved with momentum indicators, including leading and lagging indicators, and learning how to use them to make good decisions. All of these should be learned accordingly as well.