Momentum indicators calculation compares the most recent closing price with the previous closing price in a particular period. Having momentum indicators in your trading strategy helps you to get trade signals. But applying momentum indicators can be better used to confirm the validity of trades according to price action.
100 Line Cross
If you remember, there are two formulas to calculate momentum indicators. There is a buy or sell signal if the price crosses below or above the 100 lines if you use percentage formulas. It also signals the same thing if it also crosses below or above the zero lines if you use the other formula.
The price gains momentum higher if it crosses above the 100 lines. Conversely, the price drops below 100 lines represent the price lose momentum.
There is a high chance of whipsaws in 100 line cross. That means the price can move above the line but move right back below it.
Usually, traders like to filter signals according to the current trend. For instance, if a stock trends higher, then, the trader will only buy once the indicator falls below the 100 lines.
On the other hand, if the stock is trending lower, the traders usually do a short sale if it drops back below the line. They sell the borrowed shared then buy them back and return them at a lower price.
Crossover
Buying or selling on a crossover requires you to add a moving average line to your indicator. You can buy once the momentum indicator crosses below the moving average from above.
Yet, similar to the 100 lines, the crossover also has the same chance to experience whipsaw. You can, however, alleviated by responding to trade signals in the trending direction.
If that happens, during the drown trend you can only make a short trade once the indicator moves above the moving average, then drop below.
Divergence
Bullish divergence happens if the price moves lower while the moving indicator is moving higher. It reflects that the price is dropping and the momentum is slowing. When you get a buy signal, bullish divergence will help you confirm it.
Once the price moves higher while the highs on the momentum indicator moves lower, then, it is a bearish divergence. That represents the slowing momentum behind the selling, while the price is rising.
If you get a sell signal, then, this bearish divergence will help you confirm it.