Momentum Indicators | Indicator Series

Momentum indicators determine the strength or weakness of a stock’s price.  They measure the rate of the rise and fall in stock prices.  It compares the most recent closing price to a previous closing price from any time period.  

Ultimately, the goal is to indicate if a price is moving up or down and how strongly.  This indicator is best used to confirm, with other indicators, a buying or selling strategy rather than relying solely on this indicator to determine trade signals.

Relative Strength Index (RSI)

This momentum indicator was developed by J. Welles Wilder, the founder of several technical indicators that are now considered the main indicators in technical analysis software.  

The RSI measures speed and change of price changes.  Generally, this line on the graph oscillates between 0 and 100.  The RSI can signal when a stock is trading above or below its fair value and can signal an expectation or potential that the price will correct.  

If the line reaches 70, this indicates the stock is trading above its fair value, or it is overbought, and the price will soon correct.  Conversely, if the line drops to 30, the stock is oversold or trading below its fair value.  It has the potential for a price bounce but it may not happen for a while.

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Moving Average Convergence Divergence (MACD)

When trying to trade in the direction of short-term momentum, the MACD can be a handy tool to accomplish this.  This indicator has the potential to discover changes in the strength, direction, momentum, and duration of a trend in a stock’s price.  MACD was created in the 1960s by Gerald Appel, a money manager for 35 years.

This tool uses two lines, a short-term price moving average and a longer-term price moving average.  When these two lines cross over one another, this provides signals to buy or sell.

If the short-term moving average crosses above the longer-term moving average, this means the price has been rising at a faster rate than it has before and can indicate a good time to buy the stock. 

On the other hand, if the short-term moving average crosses below the longer-term moving average, this indicates the price has been moving downward at a faster momentum and it may be time to sell the stock.

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