The most obvious indicator for measuring momentum for many traders is the aptly named momentum indicator. It simply measures the amount that a market’s price has changed (often referred to as rate of change) over a given period of time, which you designate (14 bars is a common time period).
Another way to express the momentum indicator is that it measures the current bar’s closing price to a specific number of previous closing prices (such as the closing prices of the last 14 bars) and gives a reading as to how fast price is moving in a direction.
Because momentum measures the speed (or strength) of a market’s movement, the price bars on a chart can continue to move up (indicating an uptrend), while the momentum indicator can move down if the speed (momentum) decreases. This shows that although the trend is still up, it’s weakening and may soon be coming to an end.
Following are three common ways of using the momentum indicator to confirm a strong trend for entry and also to determine when a trend is weakening to exit a trade:
Stay with an uptrend as long as the momentum indicator remains above 0, and exit the trade when the indicator drops back below 0.
The figure shows what the chart looks like when the momentum crosses 0.
Draw a trend line on the momentum indicator line, and exit your trade when the trend line on the indicator is broken.
The figure shows an example.
Exit your trend trade when you see a divergence between price and the momentum indicator line.
There’s a higher high on price and a lower high on the indicator.
