Basic Techniques  |  JAN 2001

Trading Momentum: Overbought And Oversold Levels by Martin J. Pring

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 than others.

by Martin J. Pring