|By Nathan Young|
June 6, 2017
Period momentum indicator is as simple as it sounds, measuring the momentum of price over a given period, letting you know that an equity could be overbought, oversold, or in neutral territory.
To start, this type of indicator is very customizable and you can mold it to the time frame you are currently trading. This will help you to decide whether or not you are looking for your investment to pull back or bounce up to the next level. This alone may not help you but there are a few other indicators that can help your charting while using the period momentum indicator.
First, use standard deviation levels if possible as this can give you levels to watch for price to move to and either bounce off of or resist. However, you have to ensure you are using the right amount of data because you do not want to use 100 periods worth of data and then be using a 10 period momentum indicator because odds are that will not work well with each other due to the timing.
Another tool you could implement is Bollinger Bands, which can be used for the shorter time frames allowing you to see when a stock may flow one way or another. As with any tool, they are not 100% accurate, but it can alert you to when you should be paying slightly closer attention than you normally would.
Momentum may not take into account fundamental data as well since this is just looking at price movements. There could have been an earnings miss and the stock drops 5%, but this may not reflect well in the momentum indicator because it is just looking at price. You have to incorporate all aspects of the company because the chart typically does not tell the whole story.
Hopefully this is something you can use and tweak to fit your current set up. There are many variations of this kind of tool so be sure to test all of them and research how all of them work. Take some time and read articles and chat with other people in the investment community as then can provide you with real time feedback and applications. If you get stuck, consult your investing professional and they should be able to shed some light on your questions. Momentum is an important tool in predicting when the market may be over sold or over bought.