Momentum Indicator
Written by Andy

I’m sure that all these tools are coming back to you now – at least, if they aren’t, I hope that you’re referring back to the modules and re-reading them, as you have to know these to get anywhere with your trading future. One point that you should bear in mind is that you should use different indicators, and not rely on any one to control all your trading. At least, you need to look at a candlestick chart and find a confirming pattern.

And although the charting software allows you to get ‘black box’ indicators, and you don’t even have to know anything, I think you should know where they all come from, because otherwise if you try out some new ones you may be confirming your signals using indicators that are based on the same information as the first ones, and that wouldn’t be any confirmation at all, if you see what I mean. If you have an indicator based on price, for instance, you should look for confirmation from another indicator based on a different set of data, say, volume.

Sorry, I digressed again, but I think it’s important for you to think and understand what you are doing, instead of just plugging in numbers and expecting money to come out the end. You don’t get anywhere unless you use your noddle from time to time, at least, not in the long run.

Where was I, oh yes, momentum. That’s not such an efficient indicator usually as RSI, but it is easier to understand, which can’t be bad. This is an indicator that you will show you the momentum, which is kind of like the speed of the price movement. If the line is horizontal, don’t think that the momentum has stopped – it’s still going along, just not accelerating or decelerating. It sometimes seems to mirror the price, but doesn’t have to.

When the momentum indicator is above the signal line, the price is going up, and below means the price is falling. If you get a steep increase in the line, it suggests that the price is accelerating upwards, and of course the opposite applies.

Don’t get the momentum indicator confused with ‘momentum investing’. The momentum we use measures the energy of a trend, by reckoning in the rate of change. On the other hand, momentum investing is the simple idea that you catch on to the trend – when a stock is rising in an uptrend, you buy it on the assumption that it is doing that for a reason, and that reason will continue and the stock continue to rise. This is sort of a simpler version of Charles Dow’s ideas, as set down in the Dow Theory, that prices move in trends – well, actually, it’s much simpler, and hardly qualifies as technical analysis. It’s just simple trend following.

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