Momentum measures the strength of the market move. If the markets are in an overbought or oversold condition the momentum will give you good idea as to how far the markets are likely to go.
So how can you recognise momentum? The easiest way is to look at the market.
volume. Volumes of most leading companies and markets can be found in the ‘Financial Times’, on Channel 4 Teletext, or on the financial websites such as www.bloomberg.co.uk or www.ft.com.
Volume simply means the turnover of buying and selling shares. If a move occurs while there is a lot of volume then using the momentum principal movement is likely to continue for some time. On the other hand, if movement occurs while there is low volume then it’s likely market movement will be short-lived.
Calculating price momentum is a way of comparing the current market price of a share or commodity and the price of the same market, share or commodity a given number of days ago with the aim of predicting how fast the price may change in the future. It is calculated like this :
If the price momentum calculation is high this can indicate that the commodity, share or market is overbought, and that a fall is likely. If the price momentum calculation is low this an indicate that the commodity, share or market is oversold, and that a rise is likely. The slight drawback with this technique is that only time and experience will tell you whether a value is ‘high’ or ‘low’ compared to previous figures.