What Is a Momentum Indicator? Definition and Common Indicators

To understand momentum indicators, you first need to understand momentum. Southeast Asia-based Sea Limited (SE 0.18%) pulled a lot of growth forward during the COVID-19 pandemic. Business then slowed considerably, causing the stock to retreat from its all-time highs before it found momentum again, with a 46% gain barely four months into 2024.

Understanding Market Momentum

• Examples of these momentum indicators include the Relative Strength Index (RSI) and the Rate of Change (ROC).
• The RS line, the blue line in the chart provided, tracks a stock’s performance vs. the S&P 500.
• Momentum investors systematically chase profits, hoping to beat the crowd and get out before the reversal.
• Early positions offer the greatest reward with the least risk, while aging trends should be avoided at all costs.
• A value above 80 indicates an overbought situation for the stock, whereas a value below 20 indicates an oversold.
• The same risk-return trade-off that exists with other investing strategies also plays a hand in momentum investing.
• Using a stock momentum scanner that allows you to customize parameters such as finding stocks hitting new highs can also help.
• For trending analysis, momentum is a useful indicator of strength or weakness in the issue’s price.

Citi also upgraded Norwegian Cruise Line Holdings (NCLH) and opened a “90-day positive catalyst watch” for Royal Caribbean (RCL), as part of the earnings preview for the industry. A positive chart pattern named such because it resembles the outline of a coffee cup with a handle. The pattern can last from seven weeks to as long as a year, but most are three to six months. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

Top five momentum indicators to trade with

These automated investment services use algorithms to create and manage portfolios, with some allowing users to tilt their allocations using momentum strategies. Fortunately, several alternatives allow retail investors the ability to gain exposure to momentum strategies without the need for intensive personal management. Because they are dealing with stocks that will crest and go down again, they need to jump in early and get out fast. This means watching all the updates to see if there is any negative news that will spook investors. Early positions offer the greatest reward with the least risk, while aging trends should be avoided at all costs. The opposite happens in real-world scenarios because most traders don’t see the opportunity until late in the cycle and then fail to act until everyone else jumps in.

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When using momentum indicators, it’s important to remember that they are just one piece of the puzzle. They should be used with other technical and fundamental analysis tools to make informed trading decisions. Momentum indicators are useful tools for traders to identify potential market trends. Momentum indicators use mathematical calculations to measure the rate of change of a stock’s price over time. There are several types of momentum indicators, each with its unique formula and interpretation. Momentum investing is quite different from many of the strategies typically employed by long-term investors.

Relative Strength Index (RSI)

However, if there’s negative news about the company or the industry, that bullish signal might not be reliable. One common strategy is to use a moving average crossover, where you look for the shorter-term moving average to cross above or below the longer-term moving average. When the shorter-term average is above the longer-term average, it’s a bullish signal, indicating the trend is up.

Exiting With Profits

The same risk-return trade-off that exists with other investing strategies also plays a hand in momentum investing. Momentum investing can turn into large profits for the trader who has the right personality, can handle the risks involved, and can dedicate themselves to sticking to the strategy. Tighten up stops or consider a blind exit when technical barriers are hit like a major trendline or previous high/low. Exit or take partial profits when crossovers signal potential trend changes. The firm upgraded Norwegian Cruise Line to buy from neutral and raised its price target to 30, up from 20, citing its recent strategy shift.

Top Momentum Trading Tips

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics Stock Momentum and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

Choosing a Momentum Scanner

If the trend line is down, the trend is down and the momentum investor sells the stock. They attempt to achieve alpha returns by investing in stocks that trend one way or another. Some are hotter than others (as measured by growth over a period of time).

Selecting the Right Security for Momentum Trading

The best momentum trades come when news of a shock hits, triggering rapid movement from one price level to another. In turn, this sets off buying or selling signals for observant players who jump in and are rewarded with instant profits. Another batch of momentum capital enters as the trade evolves, generating counter swings that shake out weak hands. The hot money finally builds to an extreme, triggering volatile whipsaws and major reversals.

• The firm estimates that Norwegian could achieve 23% annual earnings growth over the next three years.
• Although he wasn’t the first to use the strategy, fund manager and businessman Richard Driehaus is often credited as being the father of momentum investing.
• Momentum indicators can help identify potential reversals, as they can give you insight into whether the market is overbought or oversold.
• Just as some stocks seem to go up illogically just because investors like them, other stocks can crash and burn when Wall Street gives up on them.
• From the chart above, we can see that the price is forming a higher high.
• Welles Wilder Jr. in the late 1970s; his “New Concepts in Trading Systems” (1978) is now an investment-lit classic.
• When making trading decisions, it is important to consider other factors, such as market trends, news events, and economic indicators.
• Some traders use them to time their entry and exit points, while others use them as a confirmation tool to validate other indicators or chart patterns.

Closing price compared to moving average

As a certified market analyst, I use its state-of-the-art AI automation to recognize and test chart patterns and indicators for reliability and profitability. It has a gaming platform (Garena), an e-commerce platform (Shopee), and a digital payments platform (SeaMoney). In 2023, SeaMoney’s e-commerce revenue grew by 23% year over year, and financial services revenue increased 44%. Shopee saw 46% more orders in the fourth quarter than in the same period in 2022, and despite the rapid growth in SeaMoney, loan quality remained stable. If you aren’t familiar with its business, Kinsale is an insurance company.

A proprietary stock-rating model, the Zacks Rank utilizes the power of earnings estimate revisions, or changes to a company’s earnings outlook, to help investors create a successful portfolio. Positive histogram values indicate a bullish trend (and, just as with the ADX, higher numbers indicate a stronger trend); negative (below zero) values indicate a bearish trend. It is calculated as the difference between the MACD indicator and the signal line.

• Higher moving average trendlines signal positive momentum while descending moving average trendlines signal negative momentum.
• The past performance of any trading system or methodology is not necessarily indicative of future results.
• Growth investors, on the other hand, are more concerned with a company’s financial strength and health, and its future outlook.
• Exit when the price is moving rapidly into an overextended technical state.
• He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
• Shopee saw 46% more orders in the fourth quarter than in the same period in 2022, and despite the rapid growth in SeaMoney, loan quality remained stable.
• “With nearly half of 2025 booked and less inventory remaining for sale than the prior year, we are leveraging strong demand to achieve record ticket pricing,” Weinstein said in the release.
• A Relative Strength Indicator (RSI) is a momentum indicator that is used to track the price changes in security.

Free stock scanners are great, but they are very limited in what they can offer in terms of customization and functionality. If you are looking for an advanced stock screener to propel your research in the stock universe. The Simpler Scanner has many features that can cater to your strategy and assist you in analyzing the market.

Instead of the traditional philosophy of trading—buy low, sell high—momentum investing seeks to sell low and buy lower, or buy high and sell higher. Instead of identifying the continuation or reversal pattern, momentum investors focus on the trend created by the most recent price break. Yes, momentum trading strategies have proven to be effective in various market conditions, especially in markets that exhibit strong trends.

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• Conversely, if the price is making lower lows, but the momentum indicator is making higher lows, it may be a sign of bullish divergence.
• Benzinga Pro is another excellent tool that combines stock screening capabilities with news feeds, charting and SEC filings.
• A stock that surges in volume on good news is often a good candidate for trading momentum.
• Momentum indicators are technical analysis chart overlays to assist traders in identifying a stock price movement’s strength and direction.
• RS tells you how your stock is trading relative to the S&P 500 and should not be confused with RSI, which stands for Relative Strength Index.
• We will also show you three different momentum strategies to take your trading skills to the next level.
• The momentum indicator has less smoothing than other momentum-type indicators like RSI so the signal line is more reactive.
• Momentum investing can also be a popular strategy among professional investors such as hedge funds.

For example, some equity traders closely watch the Treasury yield curve and use it as a momentum signal for equity entries and exits. A 10-year Treasury yield above the two-year yield generally is a buy signal, whereas a two-year yield trading above the 10-year yield is a sell signal. Notably, the two-year versus 10-year Treasury yields tend to be a strong predictor of recessions, and also has implications for stock markets. A stock scanner – also known as a stock screener – is a software tool that enables traders to identify stocks that meet a trader’s specified criteria quickly. One of the leading fundamental stock screeners is Stock Rover, which offers robust research tools and an extensive database for evaluating stocks.

Carnival Cruise Earnings

However, the success of momentum trading strategies mostly depends on the trader rather than the strategy. A momentum trader thrives in volatile and hectic markets, and has the ability to take and extend profits during trending markets. This momentum strategy uses the Average Directional Index (ADX) along with a 200-period moving average on a daily chart. The key here is to look for a rising ADX, which indicates strengthening momentum. A trade is initiated when the ADX starts trending upwards, and the asset’s price breaks through the 200-day moving average.

Meta Platforms

If the MACD line 1 has a negative value, it means the stock is in a downtrend. In this case, a positive line 2 value would mean a weak downtrend and a negative line 2 value would mean a strong downtrend. For example, if the MACD line 1 has a positive value, it means the stock is in an uptrend.

Sources for Momentum Data

A stock can have all the positive momentum in the world but drop like a rock in reaction to a bad economic report. Using a momentum scanner will give you an edge in the market and help you make better and more timely trades. High or increasing volume is commonly interpreted as a sign that the existing trend has strong momentum. A volume scan requirement might be something like, “Current trading volume greater than 10-day average trading volume”. I have seen the best educators and trading coaches utilizing Trade Ideas to increase profitability.

If you are interested in trading the best stocks in the market, you should consider signing up for The MEM Edge Report. My report is updated twice a week with carefully chosen stocks that I think are the best in the market. One of the most common ways to interpret momentum indicators is by looking for overbought and oversold conditions. When a stock is overbought, the price has risen too far, too fast, and is due for a pullback.