Momentum Indicators

Momentum indicators are useful for determining the rate at which the price of the underlying security changes. These indicators plot the rate of price change rather than the price change itself and are usually leading, oscillating indicators. Some of these indicators, such as the Stochastic Oscillator and the Relative Strength Index (RSI), have an upper and lower boundary (usually 100 and -100) while others, such as the Commodity Channel Index (CCI) and the MACD, are unbounded. In the case of the latter, extreme reading over a relatively long period of time may be used to determine where the overbought and oversold areas are located.

The other popular momentum indicators include the Chande Momentum Oscillator, Mass Index, Momentum Indicator (MTM), Relative Momentum Index, Stochastic Momentum Index, Trix, and Williams' %R.

Commodity Channel Index (CCI)

Commodity Channel Index
Commodity Channel Index

The Commodity Channel Index (CCI) is a leading cycle indicator developed by Donald Lambert to identify the cyclical movement of commodities but it can also be used for stock, forex, futures and other securities. The CCI compares the typical price of a security to its simple moving average (SMA) and plots the result as an oscillating percentage.

Lambert recommended that a third of a complete cycle be used as the period for the CCI. Thus, if the cycle takes 60 periods to complete, then a 20-period CCI would be recommended. Once you have determined the period ...

Relative Strength Index (RSI)

Relative Strength Index
Relative Strength Index

The Relative Strength Index (RSI) is one of the most useful momentum indicators around and is one of the most widely used oscillating indicators. The RSI determines overbought and oversold conditions by compares the magnitude of a security's recent gains to the magnitude its recent losses.

RSI is calculated using the formula: RSI = 100 - 100/(1 - RS) where RS is (Average Gain) / (Average Loss) for the specified period. However, Average Gain and Average Loss are not true averages as they are divided by the period of the RSI. The RSI varies between 0 and 100 ...

Smoothed-RoC (S-RoC)

Smooothed Rate of Change

The Smoothed-RoC (S-RoC) is a leading momentum indicator that was developed by Fred G Schutzman as a refinement of Rate of Change (RoC). Like the RoC, S-RoC measures the strength of a trend by determining whether the trend is accelerating or decelerating. However, while the RoC compares the latest price close to a previous and is quite erratic, the Smoothed RoC compares the latest value of the EMA to the value of the EMA at an earlier point in time.

Because the S-RoC is based on EMAs, it is far less erratic and far less prone to generating ...

Williams' %R (Wm%R)

Williams' %R
Williams' %R

The Williams' %R (Wm%R or %R) is a leading oscillating indicator developed by Larry Williams in 1973 to identify the strength of a trend by determining whether the latest price has closed the nearer the high or nearer the low of the specified period. A close near the high is considered bullish while a close near the low is considered bearish.

The Williams' %R provides three different trading signals: divergence; swing failures; and overbought and oversold conditions. The -80 and -20 lines are the overbought and oversold reference lines that can ...