Momentum indicators are technical analysis tools that help traders gauge the force behind and direction of trends. These indicators can show traders optimal entry and exit points and provide valuable insight into whether a trend is likely to continue or reverse.
Let’s break down five of the most popular indicators:
🔸 Relative Strength Index (RSI). The RSI is one of the most popular and well-documented momentum indicators. It measures the speed and change of price movements by comparing the average gain to the average loss over a specified period, usually 14.
🔸 Average Directional Index (ADX). The ADX is a momentum indicator used to determine a trend’s strength. Unlike most other momentum indicators, its reading doesn’t move according to the direction of price action, i.e. it doesn’t move up if bullish or down when bearish. Instead, it ranges from 0 to 100, with values above 25 indicating a strong trend and below 20 suggesting a weak or non-trending market.
🔸 Commodity Channel Index (CCI). The CCI is a versatile momentum indicator that measures an asset's price deviation from its average price, relative to its mean deviation. It uses a constant in its calculation to ensure that 75% of values fall between +/- 100, with moves outside of the range generally indicating a trend breakout or continuation. It can also show extreme overbought or oversold conditions when its value exceeds +/- 200.
🔸 Moving Average Convergence Divergence (MACD).The MACD is a highly regarded trend-following momentum indicator that shows the relationship between two moving averages of an asset's price. It subtracts a longer exponential moving average (EMA) – usually 26 periods – from a shorter EMA – typically 12 periods – to produce the MACD line. It then uses a 9-period EMA of the MACD line to plot the signal line. MACD also commonly features a histogram that shows the distance between the MACD and signal lines.
🔸 Momentum. The Momentum indicator is a simple yet effective tool that measures the rate of change in an asset's price over a specific period. It compares the current closing price to the closing price a specified period ago (usually 14 or 30). The value of the Momentum depends on the market it’s applied to. For example, using the Momentum indicator in stocks will result in a fluctuating value typically between +/- 20, depending on the stock’s price. For forex pairs, its range may look more like +/- 0.02.
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