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Momentum

www.cmsfx.comThe Momentum indicator is one of the simplest equations available in modern technical analysis. Momentum is a measure of price change velocity calculated as the difference between the current bar's price and the price a selected number of bars ago. Basically, it represents the rate of change of the trading instrument's price over those specified time periods. The faster prices rise, the larger the increase in momentum. The faster prices decline, the larger the decrease in momentum. As the price movement begins to slow the momentum will also slow and return to a more median level.

Interpretation

The Momentum indicator is a versatile indicator capable of producing a wide array of buy and sell signals. However, there are three basic methods of interpreting the Momentum indicator:

Zero-Level Crossovers: A buy signal occurs When Momentum crosses above zero and a sell signal occurs when momentum crosses below zero.

Extreme OverBought/Oversold Levels: To use Momentum as an overbought/oversold indicator, the user must identify potential overbought and oversold levels based on previous indicator readings; When choosing the overbought and oversold levels the user should ensure that at least two-thirds of previous Momentum values fall between the overbought and oversold levels. Readings above the overbought level imply an overbought condition (and a pending price correction) while readings below the oversold level imply an oversold condition (and a pending rally).

Trend Line Breakouts: Trend lines can be drawn connecting the peaks and troughs of the Momentum indicator. Often momentum begins to turn before price thereby making it a leading indicator. Momentum readings breaking above a declining trend line warns of a possible bullish reversal while Momentum readings breaking below a rising trend line warns of a possible bearish reversal.

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