Momentum in a sports setting sometimes comes to a team when they are still losing the game. They just somehow sense that a turn around has taken place and that they will ultimately triumph. It may have changed with a particular play, series or inning but somehow everyone in the game as well as the spectators can just feel it.
Momentum in the stock market is much the same. It can be just a feeling, without any solid analysis, that a stock or a market is going to go higher or lower in price. Many, many people buy and sell stocks using these feelings alone to guide them. They just have the feeling that things will work out the way they want them to and are confident enough to put their money up to prove it.
I don't for an instant recommend this method of trading because I know that I am not comfortable trading in this way. I do know several people who do trade this way and are fairly successful with it. It amazes me how they do it and even how they can do it. I require more evidence for me to be willing to stick my neck and my money out on the chopping block. I want to see charts and figures or something solid I can work with.
If you are like I am and have to have something tangible you can look at and use, there are quite a few indicators and methods developed over the years designed to help you. To name a few of the momentum indicators used in technical analysis, remember this is about momentum, are the rate of change indicator, the MACD indicator and the relative strength indicator but there are many others.
A lot of the indicators used in technical analysis are trend following methods and indicators. Some of these are moving averages, trend lines and price recognition patterns. These can all be wonderful indicators and should be taken into consideration in your technical analysis but they will tell you about trend changes after the changes have already taken place. They don't help you in determining if a change is occurring right now.
Momentum indicators attempt, with varying degrees of success, to tell you about trend changes as they are taking place or even before the change of trend has started to occur. For this reason alone, momentum oscillators should be important to you in your stock analysis and something to consider when doing your analysis.
Let's think about what momentum is and attempt to describe it in a way that does not use the stock market or stocks. Imagine a rocket car sitting at a complete stop, slowly idling out in the desert on a perfectly flat track. There is no wind and no obstructions. There is nothing to impede the rocket car and nothing to help propel it other than the 1 gallon of rocket fuel in its gas tank. The car is sitting perfectly still so there is no momentum.
The driver is given the signal to start and floors the accelerator; off we go. The car gains speed until finally that 1 gallon of rocket fuel is gone and the engine shuts off. Does the car then immediately stop? No, certainly it does not. It may slow down for quite some distance before finally coming to a complete stop.
Now let's think of how we might measure the momentum of this rocket car. For this comparison, I will use the rate of change indicator to show us the momentum. As the car first starts down the track the rate of change continues to go up as the speed of the rocket car increases. The momentum and speed of the car will steadily gain until the vehicle's gas is exhausted. The instant the rocket fuel is exhausted is the point of the highest rate of change and the greatest momentum. After the fuel is gone and the engine quits, the car continues to coast down the track and the momentum is decreasing as the speed of the car decreases. Finally the car will come to a stop and there is no rate of change and no momentum; we are back where we started.
Stocks and markets act in much the same way, although with some uneven changes in the momentum thrown in along the way. After a change in trend or direction occurs the momentum of the stock increases steadily. Of course, this is also relative to the time period you are analyzing. As with our rocket car, when the stock has used up its fuel, the speed or momentum peaks and slowly starts to decrease. After the main part of the trend is over the stock slows its price movement as it loses more and more momentum. Eventually, just like the rocket car, it will stop but unlike the rocket car, reverses trend and starts to move in the opposite direction.
The easiest way to make money in the stock markets is to recognize these trends and periods of high momentum and trade with them. It's the trend is your friend, kind of thing. I also have a saying that I continually remind myself of and it is THE MONEY IS IN THE MIDDLE. What that means is that the easiest place to make money in the stock market is in the middle of the momentum moves or trends no matter what time period you are using. If you are a day trader and use hourly prices you can still profit the easiest in the middle of the trends within the 1 hour time frames. If you are much longer term and use only monthly data, you will still find the easiest profit in the middle of that time frame.
Everyone, including myself, are always seeking to find the top or bottom and a reversal of the trend so we can make our buys or sells. It is a good feeling and a matter of pride to be able to pick the tops or bottoms and make your trades appropriately.You will also make substantial money if you are able to do this consistently.
If you are newer or less experienced or just unlucky and not able to accomplish this, then the fact of the matter is, the easiest money is "IN THE MIDDLE". When you are in the middle of these moves you can be more certain the trend will continue and can profit handsomely from it. You also are able to do so with less risk. You may want to concentrate on just this area of the market moves. You could make your money when it's easy and stay on the sidelines for the rest of the time. You'll be able to sleep easier at night and not spend so much time trying to pick all those small tops and bottoms.