When considering momentum, it is all about the point of ‘0’ and the movement around this level. When the momentum falls below this point, the technical event is a bearish signal. However, a rise above this will be a bullish signal. In essence, momentum takes a look at how the price of an instrument has changed and developed over time. Because it considers the strength of each price, momentum is a significant tool. A strong momentum will be seen when the price trends are healthy, and a decreasing momentum will occur with weakening trends. Furthermore, momentum will also indicate the short-term overbought and oversold extremes.
Momentum is typically shown as a ratio with one side showing today’s price and the other showing the price ten periods ago. Similar to the MACD, momentum can be used to follow trends because when the indicators peaks and then turns down, this indicates a bearish signal. When the indicators bottom and turn up, this shows a bullish signal.
Compared to their historical values, the momentum indicators reaching higher low values may call for a continuation of the current trend. For example, if momentum reaches high values and then turns down, it can be assumed that price will reach a higher point. Regardless, traders should always confirm the signal via prices before buying or selling. As a leading indicator, momentum assumes the fact that a rapid price increase will identify the market tops.