Momentum Indicator

The Momentum Indicator, also confused with the Rate of Change (ROC), is an indicator that compares the current price to that of N periods ago (usual 10). The formula that calculates the Momentum is as follow:

Momentum = Closetoday – CloseN days ago

The Momentum thus represents the absolute difference between the closing prices. This is often confused with the Rate of Change indicator that measures the relative difference between the prices:

Rate of Change = (Closetoday – CloseN days ago) / CloseN days ago

Momentum and Rate of Change can be used in the same way. When the indicator crosses the zero level it can signal to buy or to sell. When the Momentum is below the 0 level for a while and it starts moving upwards, the break of the zero level would signal a buy. The indicator can also be used to pick tops and bottoms.


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