The momentum indicator is one of the simplest technical analysis equations available. It is a calculation of the difference between the current market price of a share (or other instrument) and the price of the same share a certain number of days ago.
| MI = (current value - value N days ago) |
In the example below, the interval used is 7 days. The column on the right shows what the MI figures would be.
| Price | 120 | 127 | 132 | 134 | 134 | 131 | 126 | 120 | 122 | 128 |
|---|---|---|---|---|---|---|---|---|---|---|
| MI | 7 | 5 | 2 | 0 | -3 | -4 | -6 | 2 | 6 |
If you are a regular trader you would tend to use a low value for N, and if you are a longer term investor you would use a higher one.
So - having plotted the MI figures on a chart, how do you interpret them? The rules are very simple:
In other words you are buying when the price is picking up momentum and selling when that momentum has been lost.
Like many other analysis tools, it is a lagging technique so you will always be entering the market after it has made a turn or reversal. But although you will miss the beginning of the change you should be able to capture the later action.
You can see this in action from the charts of BT's share price below. The top one shows the share price. The bottom one shows the Momentum Indicator, with the buy and sell points as the MI crosses the 0 line.
Click here for the full size graph.
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