Market trading is an exciting activity that can be both thrilling and challenging. But to book decent profits and create a corpus, you must trade frequently and learn to analyse trading charts and patterns. You should also be aware of the various technical indicators and leverage them at the right time in your trades. Here’s a brief guide on the different types of momentum indicators.

What are the momentum indicators in technical analysis?

Momentum indicators are those tools that traders use to understand the rate or speed at which the prices of securities change in the trading market. Also referred to as oscillators, they are typically depicted by a line, which oscillates around 100. The oscillation feature is used to analyse stock prices and trends.

Different types of momentum indicators

Here are the different momentum trading indicators you can use:

1. The RSI Indicator

The Relative Strength Index or the RSI indicator is a type of momentum indicator which measures the change and speed of price fluctuations. This indicator oscillates from 0 to 100. RSI is usually considered as overbought upon breaching 70, and it is deemed oversold upon falling below 30. This indicator generates signals by observing both divergences and incompetent swings. The RSI indicator also helps identify general trends. If the indicator shows overbuying, it is deemed as a good time to sell your securities and make profits. Similarly, if it indicates overselling, you should buy securities. The following formula is used to calculate RSI:

RSI = 100 – [100 / (1 + (Average of Upward Price Movement/ Average of Downward Price Movement))]

2. The MACD Indicator

Often touted as the best momentum indicator, the Moving Convergence Divergence or MACD indicator is primarily useful in trading trends. Although it is not technically an oscillator, the MACD indicator helps identify overbought and oversold conditions. On a technical chart, the MACD indicator appears as two lines, with no boundaries. If the MACD indicator points above zero, the market is deemed as bullish, whereas if it is below zero, the market is deemed bearish. The formula used for calculating the MACD indicator is as under

MACD = 12 period EMA – 26 period EMA where EMA is the exponential moving average.

3. The ADX indicator

Another popular momentum trading indicator is the Average Directional Index or ADX indicator, which typically assists in measuring the strength of a trend. This indicator attempts to estimate the price strength of securities in both directions – positive and negative. If the ADX appears to exceed 25, it suggests a strong trend, whereas if it appears to be less than 20, it means that no trend exists. To calculate ADX, you have to obtain the average or mean of the value of indices, over a specific period.

4. The ROC Indicator

Regarded as a pure momentum indicator in technical analysis, the Rate of Change or ROC indicator compares the price of securities ‘n’ periods ago, with its current price. It develops into an oscillator, fluctuating below and above zero, wherein the upward ROC movement depicts a sharp price surge, and the downward leap signifies a sudden price slump. The following formula is used to calculate ROC

ROC = {(Today’s Closing Price – Closing Price ‘n’ periods ago) / Closing Price ‘n’ periods ago} x 100

Final note:

The best momentum indicators are those that you can combine with other indicators and tools. These calculators generally do not work to identify movement directions; just the time frame in which a price change occurs. Reach out to our team of advisors at Angel One to know more about momentum indicators.