ASX Charting Course

Chapter 19

Momentum

Momentum = Current Price – Previous price

M = P(n) – P(n-t)

where n is the current period
and t is a parameter determined by the user, the default is 10.

Momentum is a one dimensional measure of how far price has moved over a fixed period of time. The momentum indicator is usually plotted as a single line chart below the bar chart and reflects how fast a market is moving, in either direction, up or down. It can be positive or negative, depending on whether the market is higher or lower over the reference period.

Momentum can be used as an oscillator type study and can therefore be often misconstrued as an overbought oversold indicator. The overbought/oversold levels can be extremely difficult to determine and one should consider using this approach only in conjunction with another trend following indicator. Then it should only be applied when the market is not trending.

Divergence

Divergence is another application technique that can be used with the momentum indicator. Keeping in mind the momentum indicator is a crude measure of the velocity of price movement in the market, we can use it to confirm the continuation of a particular move or price action.

In the example below price has just broken out to make a new recent high. The current price is well above the previous high peak at 3811 when the indicator was up at +500. This same indicator is currently down at +366 while price is up at 4056, that’s divergence. The market is not going as fast now, as it was at 3811, when it obviously ran out of steam last time. One could deduce from the divergence in the market that a correction or consolidation is nigh.

Fig 28 © Copyright 2003 CQG, Inc. All rights reserved worldwide