Momentum Trading HQ
Technical Indicators
Momentum traders aren’t necessarily worried about the fundamentals of the underlying asset such as its long-term growth prospects and the economic circumstances surrounding it. All a momentum trader generally cares about is price action. This is why most momentum traders rely heavily on technical analysis and indicators to determine when to enter and exit each trade.
Popular momentum indicators include:
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Moving Average Convergence Divergence (MACD)
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Relative Strength Index (RSI)
The Commodity Channel Index (CCI) is a momentum indicator that measures the difference between the current price and the historical average price. The CCI typically oscillates between +100 and -100, indicating overbought and oversold conditions respectively. Zero line crossovers can also be used to determine emerging trends. When the CCI crosses above the zero line, it is often considered a bullish signal, and when it crosses below zero, it is considered bearish.
The Moving Average Convergence Divergence (MACD) is a trend following momentum indicator that shows the relationship between two exponential moving averages of a securities price. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA and a nine-period EMA is called the signal line. Traders may buy the security when the MACD line crosses above the signal line and sell the security when the MACD line crosses below the signal line.
The Momentum Indicator is the most popular momentum indicator. It takes the most recent closing price and compares it to the previous closing price, which can be used to identify the strength of a trend. The indicator is an oscillator; it is displayed as a single line which moves to and from a centerline of zero. When the Momentum Indicator crosses above the zero line, it is often considered a bullish signal, and when it crosses below zero, it is considered bearish.
The Relative Strength Index (RSI) measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security. The RSI is displayed as an oscillator on a scale of zero to 100. When the RSI crosses above 50, it is often considered a bullish signal, and when it crosses below 50, it is considered bearish. A RSI reading of 70 or above indicates an overbought situation, whereas a reading of 30 or below indicates an oversold condition.
The Volume Weighted Average Price (VWAP) is a technical indicator used on intraday charts and is a trading benchmark that represents the average price a security has traded at throughout the day, based on both volume and price. VWAP is important because it provides traders with pricing insight into both the trend and value of a security. VWAP is used in different ways by traders. Traders may use VWAP as a trend confirmation tool and build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it, overvalued. If prices below VWAP move above it, traders may go long on the stock. If prices above VWAP move below it, they may sell their positions. VWAP's incorporation of volume is valuable to traders for what it can indicate about the degree of trading activity during short periods of time—whether the competition is taking or exiting positions.