What Is Momentum?
Momentum is one of the simplest indicators in technical analysis. Its main role and advantage is simplifying the information about strength and speed of change over a defined time period.
Momentum shows you how much a particular variable (such as a stock’s closing price) has changed recently. By comparing the current Momentum’s value to its values in the past, you can see how strong the current market’s trend is.
Closing Price Momentum Formula
The most commonly used version of Momentum in technical analysis is Price Momentum – Momentum of closing prices. Its calculation is very simple. The only parameter you need is the period (or length) of the Momentum – let’s call it N.
Momentum is calculated as the difference between current bar’s closing price and the closing price of the bar N bars ago:
- Momentum = Close – Close.N
- Close = current bar’s closing price
- Close.N = closing price of the bar N bars ago
Momentum Is an Oscillator
It is evident from the Momentum equation above that Price Momentum:
- can reach either positive or negative values,
- oscillates around zero, and
- is measured in price units.
Price Momentum is an oscillator. Like Stochastics, RSI, or %R, Momentum oscillates around zero. However, unlike these three indicators (and similarly to MACD), it is not measured in percent and doesn’t only reach values from -100 to 100 or from 0 to 100. In general, Momentum is measured in the same units as the underlying variable. Price Momentum is measured in price units.
Examples of Momentum Values
Theoretically, Momentum can reach values from negative infinite to positive infinite.
If a stock has fallen from 54 to 41 in the last 20 days, the 20-day Momentum is -13.
If a stock’s closing price was 10 dollars 20 days ago and the current closing price is 120,351 dollars, the 20-day Momentum would be 120,341 (dollars).
Using the Momentum Indicator with Other Variables
The use of Momentum is not limited to closing prices. You can apply Momentum to other variables in technical analysis, like moving averages, volume, or other indicators. In fundamental analysis, a company’s earnings momentum is commonly measured and used for finding growth stocks. You can also apply Momentum to macroeconomic variables like public debt, house prices, or unemployment rate.
The calculation of momentum in all these applications always follows the same logic: you subtract the value of the particular variable N bars (or days, months, years) ago from the current value.