When combined with a sound trading strategy, momentum indicators have a proven record of success that extends back decades. While there are thousands of oscillators out there, a handful have risen to prominence among traders and gained widespread adoption by many trading platforms. Some of these are free, and others are available as part of commercial trading products. All have a unique place in the trader’s toolbox.
Momentum oscillators are used to identify the strength of current trends and when they are likely to reverse. While many traders use them on their own, they are most often used in combination with other technical indicators that reveal the direction of the trend.
The most well-known momentum indicator is the Stochastic Oscillator which was developed in the 1950s by George Lane. It is also referred to as “Lane’s Stochastics.” While different sources interpret the indicator in slightly different ways, most will agree that an %K above some threshold value such as 80 is a common bullish momentum signal and an %D crossing from below is a common bearish signal.
Another popular momentum indicator is the Rate of Change which measures the percentage difference between upward and downward price movements over a given period. It is similar to the RSI (Relative Strength Index) but tends to generate more reliable signals due to its smoothing. Other popular momentum indicators include the Positive Volume Index, Twiggs Momentum Oscillator, Adam White’s Vertical Horizontal Filter and Williams % Range.
All of these indicators fall under the category of momentum oscillator and are useful in identifying potential market changes. However, it is important to understand that the chosen time frame will greatly affect the signals generated by these tools. Using a shorter time period may lead to false signals as the indicator will not be able to capture the true momentum of the market. On the other hand, a longer time frame may lead to missing significant trend turns as the indicator will not move fast enough to catch them.
Momentum indicators are generally lagging in nature meaning that they will often provide signals after a price move has already occurred. Traders should therefore use them in conjunction with additional indicators and price analysis to identify entry points.
In addition to providing entry and exit signals, these indicators can be used to identify overbought or oversold conditions. However, it is important to remember that they can be prone to erratic behavior and should only be used as a confirmation of other signals or in combination with trend lines.
As with any trading indicator, it is important to be aware that there are no 100% accurate indicators. They can sometimes be influenced by other factors such as volatility or fast market moves that will result in them giving false signals. Therefore, it is crucial to have a sound trading strategy that can be adapted to changing market conditions. This way, the trader can keep his or her edge.