Momentum oscillators are technical indicators which measure the change in prices over a given time period. These indicators are very useful in trendless or sidewavs trending markets, as well as in trading band conditions. They can also help in oinoointing the turn in trends, whether they be intra-day, weekly, or very long term in nature. During a trending period though, the trend will tend to dominate any signals given by the momentum oscillator. There are three important indications to look for in all momentum oscillators: direction. extreme values and divergence from prices.
Direction
Momentum oscillators track prices verv well. and can actually lead price direction bv one to two periods. The direction
Vocabulary
ae 'value - öåííîñòü, öåíà, ñóììà
ý: divergence - îòêëîíåíèå
i: to'lead - óïðåæäàòü
crossover — ïåðåñå÷åíèå
that momentum oscillators are moving in thus corresponds to the direction in which prices will potentially move. Longer term versus shorter term momentum oscillator analysis provides indication of price direction as well. This is similar to the use of long and short term moving averages for determining nrice direction, in that cross overs are very important. A longer term momentum oscillator is one that uses a larger time period. relative to a medium term momentum oscillator. For example, a 21-day Stochastic would be considered a long term momentum oscillator, compared to a 9-day stochastic, and a 10-bar hourly stochastic would be considered a longer term stochastic in comparison to a 5-bar hourly stochastic. As a rule: "The longer term momentum oscillators have less volatility and thus they will not be subject to the number of false
signals that the shorter term momentum oscillators are,
making a case for using them in conjunction with each other.
The same effect can be generated bv smoothing a same
time period oscillator, in effect slowing it down. In this case, a moving average of a momentum oscillator can be compared to the underlying momentum oscillator, and give similar cross over signals as using the longer term/shorter term indicators.
Extreme Values
An extreme value in the momentum oscillator occurs,
when peaks and troughs are evident in the momentum oscillator chart. When the momentum oscillator reaches an extreme value, the trend in prices will generally flatten, and there is potential for a reversal of the prior trend. However, the prevailing trend of price direction is still the major trading
factor, and momentum oscillators reaching extreme values is usually a pause in the trend. Areas of extreme value are called overbought levels at momentum oscillator peaks, and oversold levels at momentum oscillator troughs. Both the Relative Strength Index and the Stochastic indicator have predetermined levels where the underlying instrument is considered to be overbought or oversold, but as peaks tend to occur at higher levels in bull markets, troughs at lower levels in bear markets, the use of predetermined levels for overbought/oversold signals is not encouraged. Other momentum oscillators such as the Net Change Oscillator (NCO) or Rate of Change Indicator (ROC) display peaks and troughs as well, but there are no predetermined valuation levels which give overbought/oversold indications.
Divergence
As prices and momentum oscillators usually trend in the
same direction, and momentum oscillators can be used for the timing of price turns, divergence in direction is an important sianal. Divergence occurs when prices continue to trend higher (or lower) and momentum oscillators turn in the opposite direction. This is most significant at new price highs or lows, but keep in mind that chart patterns such as double tops, head and shoulders, etc. can occur when divergence is seen, and one should wait for penetration of kev suooort. or resistance, in order to confirm this turn in the trend. Divergence can be used to tighten stops, or as a strong warning signal that the prevailing trend could be reversing.
These three indications are verv important in using
momentum oscillators, as used in conjunction with each other thev can help in determining trends and turning points.
Moving Average Spreads (MAS)
The formula of the moving average spread is:
MAS = shorter moving average - longer moving average
Example: (4-day MA) — (18-day MA), or
(5-week MA) - (20-week MA).
Moving average spreads are derived by taking the
difference between two moving averages. Usually one of the moving averages is a short term moving average, while the other can be intermediate, or long term. This difference, or spread, is plotted and used as a momentum oscillator.
ë
'underlying
- îñíîâíîé
of
'trough
— íèæíÿÿ òî÷êà (ïîääåðæêà)
i:
'peak
— âûñøàÿ òî÷êà (ñîïðîòèâëåíèÿ)
QT dl
'prior
— ïðåäøåñòâóþùèé
e
spread
— ðàçíèöà, ðàçðûâ
pre-set
— çàðàíåå óñòàíîâëåííûé
ae
'magnitude
— âåëè÷èíà, çíà÷åíèå
to overlay
— íàëîæèòü
