The Momentum indicator, as the name suggests is used to measure the momentum of the price change in the security over a given period of time or the look back period. The Momentum indicator is defaulted to 14 period look back and is often less widely used because of the simplicity of this indicator.
The momentum indicator calculates the rate of change by dividing the current bar’s closing price to the look back period and multiplied by 100. The momentum indicator can be used to trade ranging markets when the indicator turns higher after making a bottom or turns lower after making a new peak.
In trending markets, the momentum indicator’s divergence can be used to pick and trade the strength and weakness in the established trend.
The momentum indicator is particularly useful for signaling market tops and bottoms as it is based on the principle that momentum signals change in price and therefore in a way signals price reversals ahead of time. The most common way is to look for rising prices while the Momentum indicator starts to decline after making a peak or to look for rising momentum after making a bottom while prices continue to fall.
The indicator is ideal to be used for intra-day trading as it can signal the price reversals with good accuracy.