The momentum indicator line in a price chart allows you to find the price movement strength. Its formula compares the recent closing price to a previous closing price in any time frame. It is usually presented as one line in a section which different from the price bars or line.
The Formula
Basically, calculating momentum indicators is easy. There are two different formulas commonly used to calculate it.
Yet, those two basically do the same thing. They both compare the current closing price (CP) and the closing price in an ‘n’ periods ago (CPn). Here are the two formulas:
M = CP – CPn
M = (CP / CPn) * 100
With the first formula, it reveals the difference between those two closing prices. Meanwhile, the second formula calculates the rate of change. Thus, the result from the second formula is presented as a percentage.
Momentum indicator finds the price movement, upward or downward, as well as their strength. If the result from the first formula is in the positive number, then the recent price is above the price in the ‘n’ period ago and vice versa.
On the other hand, with the second formula, if the result is higher than 100%, then the recent price is higher than the ‘n’ period price.
In the first formula, 0.35 difference shows more upside momentum than 0.15 difference. For the second formula, a 98% momentum represents the moving down price with more force than 99% momentum.
Also read: Getting the Right Lot Size in Forex Trading
The Cautions
The momentum indicator will never give more information than what you can see from the price chart itself. If the price moves aggressively higher than you can see it in both price chart and momentum indicators.
Momentum indicators will be significantly useful to help you spot the subtle shifts in the force of buying and selling.
