Momentum and Oscillators

The study of momentum and oscillators is an analysis of price changes rather than price levels. Among technicians, momentum establishes the speed of price movement and the rate of ascent or descent. Analysts use momentum interchangeably with slope, a straight-line angle of inclination of price movement as measured from a horizontal line representing time. Momentum is also thought of as force or impact; it is often considered, as in Newton's Law, that once started prices tend to remain in motion in a somewhat straight line.

Rate-of-change indicators, such as momentum and oscillators, are usfcd as leading indicators of price change. They can identify when the current trend is no longer maintaining its same level of strength. This gives the trader an opportunity to begin liquidating the open-trend trades before prices actually reverse. As the time period for the momentum calculation shortens, this technique of leading a trend changes to become more aggressive and is interpreted as a countertrend method. Use of a rate-of-change indicator anticipates change even sooner.

Before beginning a discussion of various momentum calculations, a brief comment on terminology will be helpful to understand how various techniques are grouped together. We begin with a single price, which has no movement. When we talk about bonds at 110 or gold at $400 per ounce, we are relating a price level and not implying that prices are going up or down. Next, we describe the speed at which prices are rising or falling. It is not enough to say that the S&P rose 3 points; rather, you must specify the time interval over which this happened "The S&P rose 3 points in one hour." When you say that you drove your car at 60, you really imply that you were going 60 miles per hour, or 60 kilometers per hour. This description of speed, or distance covered over time, is the same, information that is given by a single momentum value.

The last measure is one of change in speed, which is either acceleration or deceleration. The price of the Deutschemark may have risen by .0150 dollars per mark in the past week, indicating an average speed of .0150/5, or a rise of .0030 dollars/mark per day; however, it started rising slowly and increasing its speed over the week. Perhaps the mark rose .0010 on Monday, .0020 on Tuesday, .0030 on Wednesday, .0040 on Thursday, and .0050 on Friday, increasing in speed (or accelerating) by .0010 each day. The term rate of change (ROC) will also be used to describe acceleration; when the rate of change is zero, we are talking about speed and momentum.

You will see in this chapter that speecHs a more sensitive measurement than price level, and acceleration is more sensitive than speedrThe various techniques described here are presented in order of speed and then rate of change. Following that is divergence, the most popular use of momentum indicators.

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