Novice Traders' Notebook  |  JUL 1999

Momentum by Stuart Evens

Momentum Trend-following methods and indicators have drawbacks: One, they indicate a change in trend after the fact, thereby missing a significant portion of the initial move. Two, markets spend a lot of time not in trends, but in trading ranges — and using trend-following methods with prices in trading ranges can result in whipsaw losses. To avoid these pitfalls, momentum indicators are used to forewarn of a change in trend and the reversal of price at support and resistance levels within a trading range. Momentum is not a perfect method or indicator, but used appropriately, it can be extremely useful. A thorough understanding of momentum can help in making trading decisions. Momentum, according to techni-cian John J. Murphy, can be defined as “a technique used to construct an overbought–over-sold oscillator,” measuring price differences over time. Fig-ure 1 shows the 10-day mo-mentum line for the daily chart for Intel.

by Stuart Evens