This veteran trader and market analyst starts a new series,
this time discussing the basics of momentum trading.
Momentum measures the velocity of a
price move and is a generic term that
describes the oscillators plotted under
the price series of many charts.
The same way that the word fruit
encompasses apples, oranges,
grapes, bananas, and more, momentum
embraces a host of individual
indicators, such as rate of change,
relative strength index (RSI), moving average convergence/
divergence (MACD), and stochastics, as can be seen in Figure 1.
Each indicator has different attributes, but the principles of
interpretation apply to them all. Think of it this way: Fruit is
typically sweet and is almost always grown at the time of year
when the climate is warmest. Each has individual characteristics
and grows only in specific climates and seasons; some
fruits are sweeter than others, some require hot temperatures,
and others a long growing season. Likewise, momentum indicators have some common characteristics,
but they differ in their interpretive
properties. Some momentum indicators
are more suited to specific rules