2.6 KiB
MOM - Momentum Indicator
The Momentum indicator (MOM) is price comparison in its purest form - it simply shows you how much price has changed over a set period. Like measuring the distance between two snapshots in time, MOM tells you whether prices are moving faster or slower, higher or lower than before. It's technical analysis at its most fundamental: measuring the speed of price change.
Origin and Sources
Creator: One of the earliest technical indicators, momentum calculations have been used since the early days of technical analysis.
Historical Context: Emerged from early market observations that price movements tend to continue in the same direction until momentum begins to fade.
Fun Fact: While seemingly simple, momentum was one of the first indicators to quantify what legendary traders like Jesse Livermore observed intuitively about price movement.
Core Concept
Think of MOM as your market speedometer - it measures how fast price is moving by comparing current price to a previous price. A positive reading means price is higher than X periods ago; negative means lower. The bigger the number, the faster the move. Simple, yet powerful.
Pro Tip 🎯: Watch for momentum divergence from price - when price makes new highs but momentum makes lower highs, the trend might be running out of steam.
Key Features
- Raw Price Change: Shows absolute price difference over time
- Zero Line: Clear trend direction indicator
- Divergence Signals: Early warning system for potential trend changes
Real-World Application
When to Use
- Trend Strength: Gauge how powerfully price is moving
- Reversal Spotting: Look for momentum divergence from price
- Entry Timing: Use momentum confirmation for trend trades
Common Pitfalls
- False Signals: Not every momentum dip means trend reversal
- Time Period Choice: Different lookback periods can give conflicting signals
- Price Scale Dependency: Same momentum values mean different things at different price levels
Complementary Indicators
- Moving Averages: Confirm trend direction
- Volume: Validate momentum signals
- RSI: Add oversold/overbought context to momentum readings
Further Reading
- "Technical Analysis of Stock Trends" by Edwards and Magee
- "Technical Analysis of the Financial Markets" by John Murphy
- "Momentum, Direction, and Divergence" by William Blau
Remember: MOM is like a market thermometer - it tells you the temperature of price movement right now compared to before. Simple but essential, it's often the foundation for more complex momentum-based trading strategies.