Momentum Indicator
Technical IndicatorsA basic oscillator that measures the difference between the current price and the price a set number of periods ago. Unlike the percentage-based Rate of Change, momentum uses absolute price difference and oscillates around zero.
What Is the Momentum Indicator?
The momentum indicator is one of the simplest technical tools available. It subtracts the closing price from N periods ago from the current closing price: Momentum = Current Close - Close N periods ago. If EUR/USD is at 1.0900 today and was at 1.0850 ten days ago, the 10-period momentum is 0.0050 (or 50 pips). The indicator oscillates around zero, with positive values indicating upward momentum and negative values indicating downward momentum.
Trading with Momentum
The zero-line crossover is the basic signal: when momentum crosses above zero, the current price has risen above the price N periods ago, suggesting bullish momentum. Below zero, bearish. The rate at which momentum rises or falls also matters: a steep rise indicates accelerating buying pressure, while flattening momentum suggests the move is losing energy. On daily charts, a 10 or 14-period momentum works well for swing trading USD/JPY or GBP/USD.
Momentum vs. Rate of Change
The momentum indicator and Rate of Change measure the same concept. The difference is that momentum uses absolute values (in pips or price units) while ROC uses percentage change. Momentum's absolute values make it harder to compare across different pairs since a 50-pip move on EUR/USD and a 50-pip move on GBP/JPY represent very different percentage changes. For cross-pair comparisons, ROC is preferable. For single-pair analysis, either works. Combine momentum with Bollinger Bands or a Moving Average for a complete system.
Related Terms
Rate of Change
A momentum oscillator that measures the percentage change in price between the current period and a specified number of periods ago. Positive values indicate upward momentum; negative values indicate downward momentum.
RSI (Relative Strength Index)
A momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Readings above 70 suggest overbought conditions; below 30 suggest oversold conditions.
MACD (Moving Average Convergence Divergence)
A trend-following momentum indicator that shows the relationship between two exponential moving averages. The MACD line, signal line, and histogram together help identify trend direction, momentum shifts, and potential entry points.
Stochastic Oscillator
A momentum indicator that compares a currency pair's closing price to its price range over a set number of periods. It generates %K and %D lines that oscillate between 0 and 100, with readings above 80 considered overbought and below 20 oversold.