What Are Momentum Indicators?

Momentum indicators are technical analysis tools used to determine the strength or weakness of a stock's price trend. Momentum is the rate at which a stock's price changes.

Common momentum indicators include the relative strength index (RSI), the moving average convergence♔ divergence (MACD), and Bollinger Bands. This article looks at the RSI in particular.

Understanding Momentum Indicators

Momentum is the rate at which a stock's price 🅷rises or falls. Thus, m🐎omentum indicators can give traders and investors an idea of how strong a stock's price trend may be. In turn, that can help them decide when to enter or exit a trade.

Studying the prices that assets reach clearly is useful for those who take positions in the market. But mo𓄧mentum indicators can provide additional useful insight related to the trends of prices.

Getting in on trends, whether prices are going up or down, is a time-tested way of securing profits. Getting out🍌 of trends around the times that they reverse is a way to protect profits.

History has ꦑshown that information about momentum is far more u❀seful during rising markets than falling markets.

That's because markets rise for longer periods of time than they fall. In other words, 澳洲幸运5官方开奖结果体彩网:bull markets tend to last longer than 澳洲幸运5官方开奖结果体彩网:bear markets.

RSI

The RSI was created by J. Welles Wilder Jr. in the late 1970s. His book "New Concepts in Trading Systems" (1978) is now an investment classic.

The❀ RSI measures the speed at which prices change and the magnitude of those changes. On a chart, RSI assigns stocks a momentum value between 0 and 100. Once these numbers are charted, they caꩵn be compared to standard thresholds.

Usually these standard thresholds are the level settings of 70 and 30. They are intended to serve as clear warnings of, respectively, 澳洲幸运5官方开奖结果体彩网:overbought and oversold assets.

A trader may choose to reset the RSI parameters to 80 and 20, or even 90 and 10. Doing so gives more room to overbought and o𓃲versold territory. That may ♊help traders avoid false trade signals and pulling the trigger on a trade too early.

Experts generally chart the RSI on a daily time frame rather than hourly. However, sometimes shorter hourly periods are charted to gain insight into whether it's a good idea to make a 澳洲幸运5官方开奖结果体彩网:short-term asset purchase. 

Difference Between RSI and Relative Strength

There has always been some confusion about the difference between RSI and 澳洲幸运5官方开奖结果体彩网:relative strength (RS). Relative strength compares the price of a stock to💛 a different stock or the marketཧ as a whole.

Traders use RS to pinpoint in꧑vestments to trade based on their outperforming the comparison benchmark (stock or index).

On the other hand, and as mentioned, RSI measures the velocity of the changing price of a stock. It can indicate whether or not an asset's 澳洲幸运5官方开奖结果体彩网:price action reflects overbuying or overselling.

The formula for the relative strength index is:

$\begin{aligned} &\textbf{RSI} = 100 - \left(\frac{100}{1 + RS}\right)\\ &\textbf{RS} = \frac{\text{Average of x days' up closes}}{\text{Average of x days' down closes}}\\ &\textbf{where:}\\ &RSI= \text{relative strength index} \end{aligned}$​RSI=100−(1+RS100​)RS=Average 🅰;of x days’ down closesAverage of x&🦹nbsp;days’ up closes​where:RSI=relative strength index​

Use RSI With Other Indicators

Ultimately, RSI can help to determine low-probability and high-reward setups. It works best when used with other momentum indicators, such as short-term 澳洲幸运5官方开奖结果体彩网:moving-average 澳洲幸运5官方开奖结果体彩网:crossovers.

For example, the lines of a 10-day moving average and a 25-day moving average may cross over eaꩲch other and indicate a shift in a trend's direction.

These may occur very close to the times when the RSI is either in the 20/30 or 70/80 range. Together, they provide distinct overbought or oversold readings.

The RSI can alert traders to an upcoming trend reversal, either up or downღ, sooner than other indicators. However,𓆉 keep in mind that trending prices can keep moving in the trend direction after RSI indicates an overbought (or oversold) situation.

Example

Many traders view the RSI value of 50 to be both a support and 澳洲幸运5官方开奖结果体彩网:resistance benchmark level.

If a stock price that's rising has a difficult time breaking through 50 on the upside, resistance may be too strong at that particular time. Price action may fall off until there is enough volume to break through and continue on to new and higher levels.

A stock that's falling in price may find support at the 50-value level and bounce off it again before moving upward in price.

The Bottom Line

Momentum indicatoꦬrs shed light on the strength or weakness of a price trend because of their focus on the rate a💟t which prices change.

The relative strength index, or RSI, is one such indicator. Based on standard levels of 70🎃 (overbought) and 30 (oversold), or more extreme levels if preferred, traders can determine possible entry and exit points for their trades.