Momentum Indicators
The most commonly used momentum oscillators are:
Momentum has three weaknesses:
- It does not fluctuate between set limits, meaning that Overbought and Oversold levels have to be re-set for each stock;
- Movements tend to erratic; and
- Unusually high or low prices at the start of the indicator window (e.g. 14 days ago on a 14 day indicator) cause distortion. This is shown in more detail in Momentum.
Rate of Change fluctuates as a percentage around the zero line, but the indicator still suffers from the last two weaknesses.
RSI addresses all three weaknesses: it is smoother, not as susceptible to distortion and fluctuates between 0 and 100.
Stochastic indicator compares closing price to the price range (High minus Low) for the window period. This is an improvement on the above three indicators which measure relative changes in closing price. Stochastic movements can be erratic and many analysts use the internally-smoothed Slow Stochastic indicator, which they find more reliable.
Types of Momentum Indicators
Closing Price relative to previous Closing Price
Momentum
Rate of Change (Price)
Smoothed Rate of Change
Relative Strength Index
TRIX Indicator
Closing Price relative to Range
Stochastic
Slow Stochastic
Williams %R
Closing price compared to Moving Average
Commodity Channel Index
Detrended Price Oscillator
Closing Price relative to High/Low
Williams Accumulation Distribution