The Momentum indicator measures how much price has changed over a fixed number of bars. It is one of the oldest and simplest oscillators: if the close is above the close N bars ago, momentum is positive; if it is below, momentum is negative. The size of the reading shows how fast price is moving, and the direction of the line shows whether that speed is increasing or fading.
How it is calculated
Momentum = Close - Close N bars ago (difference version)
Momentum = 100 x Close / Close N bars ago (ratio version)
Both versions exist in charting software. The difference version oscillates around zero and is in price units; the ratio version oscillates around 100. The Price Rate of Change (ROC) is the same idea expressed as a percentage, so all three lines have the same shape. Common periods are 10, 12 and 14 bars.
Because the difference version is in price units, a reading of 5 means something very different for a $20 stock and a $500 stock. To compare stocks with each other, use ROC instead.
How to read it
- Zero line. Momentum above zero means price is higher than N bars ago; below zero, lower. A cross of zero is a simple trend signal, but it lags because it only happens after price has already moved.
- Turns. Used as a trend-following oscillator, momentum gives a buy signal when it bottoms and turns up and a sell signal when it peaks and turns down. A short moving average of the indicator, such as 9 bars, helps show those turns. Wait for price to confirm the turn before acting.
- Extremes. An unusually high reading compared with the stock’s own history usually signals a strong trend, not a top. The first turn down from such a peak is often followed by still higher prices.
- Divergence. Momentum often peaks before price. When price makes a new high but momentum makes a lower high, the advance is slowing; when price makes a new low but momentum makes a higher low, selling is easing. Divergence is a warning, not a timing signal.
- Leading behaviour. Because momentum measures speed, it tends to flatten and turn before price does at major turning points, which is why it is often called a leading indicator.
Settings and common mistakes
- Period. Shorter periods (5 to 10) react faster and give more signals; longer ones (20 to 30) follow the larger trend. Match the period to the swings you trade.
- Fixed overbought and oversold levels. Momentum has no fixed range, so a level like +5 cannot be applied to every stock. Compare readings with the stock’s own history.
- Comparing stocks with raw momentum. Use percentage-based ROC when ranking stocks; raw momentum favours high-priced shares.
- The drop-off effect. Momentum can change because of the bar dropping out of the window N bars back, not because of today’s price. A sharp move N bars ago will produce a jump when it leaves the window.
Live chart: SPY (S&P 500 ETF), daily, with Momentum(12). The chart updates every trading day.
Screen for it on MarketInOut
Momentum is built into our formula language as mom(period), the difference version in price units, with a default period of 12. Stocks above their 200-day average whose 12-bar momentum just turned positive:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and mom(12) ca 0
Stocks showing bullish divergence between price and 12-bar momentum:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and mom(12) div_bull
Related: MACD, Relative Strength Index (RSI), Moving averages.
