Since many investors, traders and academics believe that markets do tend to trend either higher or lower over specific periods of time……it becomes useful to study the strength of these trends.

Momentum Indicators:

Momentum is represented in graphic form as a fluctuating line that is continually “oscillating” from one extreme to the other.  All momentum Indicators “Oscillate

Traders use oscillators as a tool to measure the extremes of market prices as prices swing from highs to lows during trading periods. What a trader is seeking to measure is the momentum of price.

What is momentum?

Momentum = Velocity of a price trend

Momentum indicators measure whether a rising trend is accelerating or decelerating or whether prices are declining at a faster or slower pace.

Think about a ball thrown into the air, it continues to rise, but at a slower pace.

Oscillators measure that pace of acceleration or deceleration.

Where can we use Momentum?

  • Currencies,
  • Commodities
  • Bonds
  • Stocks
  • Indices
  • Precious metals, etc.

 Measuring Overbought and Oversold Conditions

All momentum oscillators move from one extreme to another. Markets are essentially driven by the psychological forces of our emotions as these emotions swing from one extreme to another, from greed to fear, from hope to despair.

Using oscillators in your trading toolbox will help a trader to spot overbought and oversold conditions and act.

Types of Momentum Oscillators:

Relative Strength (RSI), Rate of Change (ROC), Moving average oscillator (MACD), Stochastics

Momentum Oscillators measure how fast price is moving since price can accelerate or decelerate. Most oscillators oscillate at extremes between 0 and 100.

Conclusion:

Oscillators assist a trader to measure the momentum or the strength of a trend. Oscillators can be used on any asset. Momentum is a tool to measure the fear and greed of the market from extreme overbought to oversold levels.

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John Knobel
Author

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