Momentum indicators

Momentum indicators are technical indicators that measures the speed of share price movements. Momentum indicators are used to identify over-reactions in the stock market.

Over-reactions implies that the stock price is rising or falling more than it should. Momentum indicators measure the rate of share price performance and can therefore indicate over-reactions for shares. Examples of momentum indicators is the price oscillator, relative strength index, momentum, stochastic and the elder-ray indicator.

Momentum indicators are usually considered to be leading indicators, when a momentum indicator indicates an upward trend this indicates a rise in the share price. Technical analysts also tend to study the divergence between momentum indicators and the stock price. When a divergence is detected it indicates that a trend reversal is about to happen.