How fast the price is on the move:momentum's the speed, not the groove.
The rate of change of a price: how far it has moved over a chosen number of periods.
Indicators such as RSI and MACD are ways of measuring it; fading momentum shows that a move is slowing, which is not the same as a reversal.
In plain words
Momentum is the speed at which a price is changing: how far it has moved over a chosen number of periods. A price that has risen 100 pips in ten periods has more momentum than one that has risen 20 pips in the same time.
See it move
Price and Momentum are drawing apart
Why it matters
Chart readers watch momentum to judge whether a move is strengthening or fading, and many indicators, such as RSI and MACD, are ways of measuring it. Fading momentum says that the move is slowing, which is not the same as saying it is about to reverse.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
The simplest momentum measure subtracts the close ten periods ago from the latest close.
- 1Latest close 1.1080, close ten periods earlier 1.1000momentum = 0.0080, or 80 pips
- 2Five periods laterlatest close 1.1100, close ten periods earlier 1.1060
- 3Momentum = 1.1100 − 1.1060 = 0.0040, or 40 pips
The price is higher than before, 1.1100 against 1.1080, yet momentum has halved from 80 pips to 40: the rise is slowing.
A common mistake
Falling momentum is easily mistaken for a falling price. Momentum can decline while the price is still rising, because it measures the pace of the move and not the level of the price.
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Educational information, not investment advice or a recommendation to trade.