This indicator compares the price of any given instrument to the price over a selected number of preceding periods.
This represents the rate of change over the chosen periods. In other words, it lets you see where is the price located relative to the historical data selected.
Usage No 1 – Trend indication
When the momentum reading is above 100 and rising, it indicates a strong move up. When the reading is below the 100 level and falling further, it indicates a strong downtrend.
It’s important to remember that we need to choose larger periods to use this indicator as a trend indication.
Usage No 2 – Overbought/oversold conditions
When the indicator reaches extreme levels and bounces back from these levels – the signals are given.
The problem with using momentum to forecast overbought and overbought conditions is that there are no pre-defined values for the indicator to be overbought or oversold. They are relative to previous indicator action.
Usage No 3 – Divergence trading
This indicator is also used to find points of divergence between the indicator and the price action.
Here is once more the same chart used with STC and RSI, the divergence is also present with momentum. From the three indicators used, in the MOM and RSI the divergence is clearer.