MOM (Momentum)
The Momentum (MOM) indicator measures the rate of change in price movements by comparing the current price to a price from a specified number of periods ago. It helps traders identify trend strength, potential reversals, and overbought/oversold conditions.
Formula
Momentum = Current Price - Price n periods ago
Where:
n = number of periods (typically 10, 12, or 14)
How MOM Works
The Momentum indicator oscillates around a zero line, with positive values indicating upward momentum and negative values showing downward momentum. The distance from zero indicates the strength of the trend. Extreme readings can signal potential price reversals, while crossovers of the zero line may indicate trend changes.
Trading Strategies Using MOM
Strategy Examples
- Zero-line crossovers for trend direction signals
- Extreme readings for overbought/oversold conditions
- Momentum divergence with price for reversal signals
- Multiple timeframe momentum analysis
- Momentum confirmation of trend changes
Support and Resistance
- Use momentum levels as dynamic support/resistance
- Look for momentum convergence at key price levels
- Monitor historical momentum extremes
- Combine with price action for confirmation
Trend Identification
- Positive momentum indicates uptrend strength
- Negative momentum shows downtrend strength
- Increasing momentum confirms trend continuation
- Decreasing momentum warns of potential reversals
Advantages and Limitations
Advantages
- Simple and easy to understand
- Effective for trend strength measurement
- Good for identifying potential reversals
- Works well with other indicators
Limitations
- Can generate false signals in choppy markets
- Lag in trend identification
- Requires confirmation from other indicators
- Sensitive to timeframe selection
Best Practices When Using Momentum
- Use multiple timeframes to confirm momentum signals
- Combine with other technical indicators for validation
- Wait for clear momentum shifts before taking positions
- Monitor momentum divergences with price action
- Use momentum readings to gauge trend strength
- Consider market conditions when interpreting momentum values
- Look for confluence between momentum and other trend indicators
- Backtest different momentum calculation periods
- Document which momentum patterns work best for your trading style
- Regularly review and optimize your momentum-based strategies