Momentum indicator

The momentum indicator is designed to detect the speed of price movement. This indicator is one of the leading indicators. The momentum is calculated by comparing the current closing price of the stock with the closing price of the previous period of the stock. N is the period of time chosen by the analyst.

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The formulas calculated in this indicator are in two ways:

M:  Momentum

CP:  Final price

CPn:  Final price over  n  time period

This formula shows the difference between the current final share price and the share price in  n  time periods as a  percentage  .

The momentum indicator fluctuates upwards and downwards, when the indicator is above the 100 line, it means that the closing price is higher than the closing   period of the n period, and when it is below the 100 line, it means that the price The final share price  is less than the closing price of the  n period. The distance between the indicator at the top and bottom of the 100 line indicates how fast the price is moving.

The figure above is the symbol of WebMelt (Bank Mellat), the  momentum indicator is shown   in the 100 line range. When the   momentum indicator is  above the 100 line, we see an upward trend in the share, and when the  momentum indicator is  below the 100 line, the share trend is down.

The advantage of using a momentum indicator

Using this indicator, we can receive signals based on buying and selling, but the most help that this indicator gives to the trader in identifying the trading trend is that he trades based on any kind of share price change (eg failure). And money backs made in the share process and …… ..).

Momentum indicator signals

• Breaking the trend line

The figure above is the share chart of Midco (Middle East Mining Industries Holding) and as indicated, the indicator has broken its downtrend and the share trend has been uptrend after the trend line is broken.

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Position of the indicator relative to the 100 line

To make better use of this signal, we add the moving average to the indicator. When the  momentum indicator  cuts the moving average from the bottom up, it is a good trading opportunity to buy the stock, and when the  momentum indicator   cuts the moving average from the top to the bottom, we take the trading position, because the trend share It will start its decline.

The image above is a web-based chart (Bank Saderat) that well illustrates the relationship between the trend and the  momentum indicator  and the moving average and the buy and sell signal.

As shown in the figure above, you must select the Navigator option and the Navigator will open at the bottom of the page.

After the Navigator opens, select the Moving Average and drag it to the momentum indicator. After adding the moving average, the momentum indicator looks like this.

• Divergence in the indicator

Positive divergence  in the indicator occurs when the price is falling, but in the indicator there is an upward trend. Consider the following example regarding the share of Khodro (Iran Khodro).

Negative divergence  occurs when the price has an upward trend, but in the indicator the trend is down, and then we see a decline in the share trend. The following example of Topico (oil and gas and petrochemical supply) shares shows a decline in the share trend after the  negative divergence  .

Trading volume and momentum indicator

Momentum   examines changes in market share prices over time, taking into account  trading volume . For example, when the volume of transactions increases, the speed of momentum changes increases and vice versa.

The figure above shows the share of Iran Telecommunication (Akhabar) which shows that with the increase in trading volume, the   momentum indicator  has found an upward trend.

Conclusion in teaching Momentum indicator

The momentum indicator allows the analyst not only to follow changes in the share price, but also to calculate the speed of these changes in the symbols. This indicator is very similar to the moving average indicator, but the main difference between the two indicators is this. The momentum is one of the  leading indicators  , but the moving average   is the delay indicator .

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