You can use the Momentum indicator as a trend-following oscillator similar to the
MACD (this is the method I prefer). Buy when the indicator bottoms and turns up and sell
when the indicator peaks and turns down. You may want to plot a short-term
(e.g., 9-period) moving average of the indicator to determine when it is bottoming or
If the Momentum indicator reaches extremely high or low values (relative to its
historical values), you should assume a continuation of the current trend. For example, if
the Momentum indicator reaches extremely high values and then turns down, you should assume
prices will probably go still higher. In either case, only trade after prices confirm the
signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to
begin to fall before selling).
You can also use the Momentum indicator as a leading indicator. This method assumes
that market tops are typically identified by a rapid price increase (when everyone expects
prices to go higher) and that market bottoms typically end with rapid price declines (when
everyone wants to get out). This is often the case, but it is also a broad
As a market peaks, the Momentum indicator will climb sharply and then fall off--
diverging from the continued upward or sideways movement of the price. Similarly, at a
market bottom, Momentum will drop sharply and then begin to climb well ahead of prices.
Both of these situations result in divergences
between the indicator and prices.