Momentum Indicators

indicators, called oscillators, used in technical analysis to measure the velocity of price movements (momentum), both up and down. In his book, Introduction to Technical Analysis, Martin Pring says, “All momentum series have the characteristics of an oscillator as they move from one extreme to the other. These extremes are known as overbought and oversold levels. An unruly dog taking a walk strains at the leash, moving from one side of the walk to the other. One moment the dog roams to the curb on his extreme left and the next he scampers back toward the lawns on his right, as far as the leash will allow him. Momentum works in a similar manner, so that when an oscillator is at an overextended reading on the upside, it is said to be overbought. When it reaches the opposite end of the spectrum on the downside, the condition is known as oversold. The horizontal line in between these extremes is called the equilibrium line.” Some of the most widely used momentum indicators are the relative strength indicator (RSI), the moving average convergence/divergence (MACD) and the stochastics index. The basic characteristics of any momentum oscillator are illustrated on the previous page.

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