In this article, we’ll give you a list of momentum indicators you must know. Learn what they are, and find out how they can improve your trades.
What are Momentum Indicators?
Traders use momentum indicators to measure the extent to which stock prices fluctuate. It’s a technical analysis tool that provides insights into the extent of the changes. In turn, it can give an idea of what your next move should be, such as whether to enter or exit a position.
By measuring momentum, you are evaluating how much a stock price rises and falls. As a result, you can assess the strengths or weaknesses of a security. Plus, you will have an idea of whether you’re trading in a bullish or bearish market.
Types of Momentum Indicators
There are different types of momentum indicators. For instance, it can be a trend indicator. The latter determines if an asset is heading towards a specific trend or if there’s a divergence.
Meanwhile, they can also be volume indicators. In this case, the indicator will show insights into the volume of trading.
Relative Strength Index (RSI)
If you’re looking for the best momentum indicator for day trading, it’s hard to go wrong with RSI. It was introduced by Welles Wilder in the 1970s.
Simply put, this momentum indicator measures the extent of price changes. On the chart, the indicator fluctuates at values ranging from 0 to 100.
An uptrend momentum is apparent when the RSI is above 50. However, when it reaches 70 or higher, there’s an overbought level.
On the other hand, an RSI value below 50 shows a downtrend. Once it’s below 30, it’s possible that there are oversold conditions.
Whether for the best momentum indicator forex or stock, the RSI is great because of the simple mathematical formula it uses. Because of this, it’s often easier to understand compared to the other momentum indicators.
Squeeze Momentum Oscillator
John Carter introduced the concept behind the Squeeze Momentum Oscillator. It’s a combination of the Keltner channel and Bollinger bands. This indicator is also quite difficult to understand, so it’s crucial to watch out.
In a nutshell, this momentum indicator shows when there’s an increase or decrease in a security’s momentum. The consolidation is next to the zero line if it doesn’t detect volatility. Otherwise, the line rises.
With the squeeze momentum oscillator, you’ll find various crosses that show different market conditions. For instance, it can show if the market is preparing for an explosive move. Understanding these crosses will let you know when to take and exit positions.
In addition, the squeeze momentum oscillator can also confirm a breakout based on certain price actions.
Moving Average Convergence Divergence (MACD)
Those who are looking for the best momentum indicator for scalping should consider using the MACD. While it’s an oscillator, only a few traders are using it for the identification of overbought and oversold conditions.
Make the most of the MACD by understanding what the patterns mean. One of the most important is to look at the point where it is. When it’s above zero, the market is bullish. On the other hand, the market is bearish when the value is below zero.
The exponential moving average affects the value of the MACD. It’s positive when the 12-period EMA is higher than the 26-period EMA. Conversely, the EMA is negative when the 12-period EMA shows below the 26-period EMA.
To calculate the MACD, you’ll need to subtract the 26-day MA from the 12-EMA. Meanwhile, to find the signal line, look at the 9-day EMA.
Momentum precedes price. This is the simple premise behind the stochastic oscillator, which is a great option if you’re searching for the best momentum indicator for swing trading.
Basically, the stochastic oscillator compares the closing price of an asset to its price ranges within a specific period. It will generate values ranging from 0 to 100. In turn, these values will indicate both overbought and oversold conditions.
An overbought range is apparent when the reading is above 80. Meanwhile, it’s oversold when the value falls below 20.
More so, it’s worth noting that a stochastic oscillator has two lines. One line shows the oscillator’s true value for every session. Further, the second line shows the three-day simple moving average.
It’s also crucial to remember that the stochastic indicator is not a price trend indicator. Instead, it’s a comparison of the closing price against the relative high and low within a certain period. Our Fasle Breakout Stochastic Indicator does take this momentum Indicator to the next level. Check it out HERE
Best Momentum Indicator, Know Sure Thing
A momentum oscillator by Martin Pring, “Know Sure Thing” allows traders to easily assess the rate of change in an asset. Crossing over the signal line shows trading signals that you can implement. At the same time, it can also show overbought and oversold conditions.
For new traders, the formula for Know Sure Thing may seem overwhelming. However, the computation is quite straightforward. It considers four rate-of-change values.
More so, when it comes to the interpretation, Know Sure Thing will move above or below the zero value. A positive value is in favor of the bulls. Consequently, a negative value sides with the bears.
You can also use Know Sure Thing in trend following. The latter is a strategy to buy a stock with a rising price and short once the price falls. The goal is to follow the trend until it ends.
At the same time, you can use Know Sure Thing for finding divergences. In case you don’t know, a divergence is when the price of an asset moves in a certain direction and the oscillator moves opposite it.
Overall, the best momentum indicator can simplify trading. They might seem complicated at first. However, they are easy to interpret when you know how they work and if you have the right tools. We have take the MACD/Stochastic Cross trading Strategy and used these momentum indicators to produce a Signal generating Strategy called the xBrat Roller Coaster. Check it out HERE