Momentum Indicator: Trend Signals and Price Divergence
Summary
The document explains the Momentum indicator as a measure of price change over a chosen lookback, calculated by dividing the current close by the close from n bars earlier and scaling the ratio by 100. It describes two common interpretations. As a trend-following tool, a turn upward from a trough may be treated as a buy signal and a turn down from a peak as a sell signal; a short moving average of the indicator can help identify those turns. Price confirmation is recommended before acting.
As a leading signal, Momentum may diverge from price near potential market extremes: the indicator can turn lower while prices continue rising or moving sideways, or turn upward after a sharp decline while prices have yet to recover. These patterns are presented as broad tendencies, not dependable forecasts. The text also notes that unusually high or low readings can indicate trend continuation, making reversal interpretation context-sensitive. It provides no settings beyond a variable lookback, examples, or performance evidence.
Key ideas
- Momentum compares the current closing price with the close from a chosen number of bars earlier and scales the ratio by 100.
- A turn upward from an indicator trough or downward from a peak can be used as a trend-following signal.
- The document advises waiting for price action to confirm an indicator signal.
- Divergence between Momentum and price may warn of a potential turning point, but the pattern is described as a generalization.
- Extremely high or low readings may also accompany trend continuation, so the indicator can support competing interpretations.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.