Understanding Momentum and MACD Indicators in Trading
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Understanding Momentum
Momentum measures how quickly prices are rising or how steeply a trend line is sloping. It functions similarly to acceleration and deceleration. Momentum indicators act as leading signal generators or confirmation tools, indicating whether the trend slope is changing.
- Confirmation: Occurs when momentum aligns with the price trend.
- Divergence: Occurs when momentum fails to confirm the price trend, providing a warning signal.
Confirmation is also used to identify overbought and oversold conditions as prices oscillate around a central trend:
- Overbought: Prices are noticeably above the central trend.
- Oversold: Prices are considerably below the trend and are likely to return toward or above the central trend.