Momentum, in technical analysis, refers to the overall rate of change in the price of an asset. Momentum is calculated simply by taking the slope of the trendline, which tracks the price levels of an asset over time.
Traders often take momentum as a measure of the volume of a market. If prices are changing rapidly in a market (meaning that momentum is high), it’s likely that a large number of traders are buying or selling the asset to push the price change in either direction. As such, extremely high or extremely low values for momentum are taken as signs that an asset is either overbought or oversold. If momentum reaches an extreme high, the asset is overbought; if momentum reaches an extreme low, the asset is oversold.
Buy signals are generated when momentum reaches an extreme low and then rapidly advances back upward across the zero line. Conversely, sell signals are generated when momentum reaches an extreme high and then rapidly falls below the zero line. Traders consider this a leading indicator of the price behavior of a given asset, and of the overall character of the market (either bullish or bearish.)« Back to Main Page