| Making Money with Momentum |
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| Written by Chris Blanchet |
| Saturday, 20 June 2009 10:10 |
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Many investors will confuse a trendline with momentum. However, as an event derived from astute technical analysis, Momentum tells investors a lot more than a cursory glance at a security price's trend line. Using technical analysis and technical events like Momentum, investors are able to determine whether a price is likely to continue its trend or reverse and head the other way.
Many investors will confuse a trendline with momentum. However, as an event derived from astute technical analysis, Momentum tells investors a lot more than a cursory glance at a security price's trend line. Using technical analysis and technical events like Momentum, investors are able to determine whether a price is likely to continue its trend or reverse and head the other way. What Is Momentum Similar to the Moving Average Convergence-Divergence (MACD) oscillator, Momentum measures how much a security's price has changed over a given time. With a understanding of technical analysis and this particular event, investors will understand whether a slight pull back in price is part of the normal fluctuations of stock prices or if it is indeed a bearish signal for the price. Put another way, Momentum gives investors insight into the underlying price trend. When using technical analysis tools in this manner, investors should be able to better identify whether a particular security is overbought or oversold and make changes to their positions accordingly. Decisions like these are impossible to make when based entirely on security prices. Calculating Momentum One of the downfalls with technical analysis is that there is a heavy mathematical component to many of the events. While this not entirely true for Momentum, investors will need to understand the basic formula required to obtain a Momentum reading. Simply, Momentum is calculated by dividing the Closing Price by the Closing price ten periods ago, and multiplying it by 100. [Close/(Close 10 time-periods ago) * 100]. Trading on Momentum Basing trade decisions on Momentum is quite simple. If the Momentum value is greater than zero, then a bullish signal is trigger; less than zero, a bearish signal is triggered. Investors should, however, be cautious in that extremely higher low values might not suggest a reversal but instead a continuation of the existing trend. For example, where investors are looking to sell, instead of trading on Momentum, investors should wait for the actual security price to begin its fall before committing to selling. In fact, with most signals derived through technical analysis, investors are advised to use other signals or patterns to confirm or refute a trade opportunity. Momentum is often used to confirm other events or price trends. As mentioned previously, many events triggered through technical analysis involve heavy mathematical calculations. For most investors who do not have the time or ability to complete their own mathematical work, trading software has evolved to the point where your computer will go so far as making simple buy and sell recommendations. Understanding technical analysis is one thing; completing the work is another. For most serious investors, trading software not only makes sense, but it improves profit. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Christ Blanchet has more than 15 years of experience as a Financial Advisor. His is the technical analysis and options contributor at Online Trader Today.com where free members can follow the Technical Analysis Series and receive a complimentary e-book on Option Sensitivities. He maintains a debt-free blog at How To Repay Debt.com |
| Last Updated on Tuesday, 23 June 2009 14:51 |