Momentum Indicators: Find The Three Best Ranked

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INTRODUCTION

The financial markets prominently known for their volatility and sharp reactions to information can at times be so ridiculous. Ever witnessed a price that goes up and up without ever having a turn around? That is how crazy the financial market trends can get. Buyers who albeit at times become irrational and greedy, tend to buy more and more as prices of financial instruments hike hoping to sell at an even higher price and realize a return. This automatically turns financial stocks into Veblen instruments like jewelry; the more expensive they get the higher the demand. This is called the momentum effect and has been the subject of so many researches.

The ‘momentum effect’ having passed all the profitability tests has come to be appreciated by technical analysts as a reliable and dependent strategy. In finding momentum stocks, the below discussed indicators are voted to be the best

THE 50 DAY AND 200 DAY MOVING AVERAGES

 

Moving averages has been both a mathematical and statistical tool used over quite along period of time. This trend following strategy is calculated by gathering the average share price over a given time period. This average is then plotted on a chart with the y-axis indicating the share prices and the x-axis indicating the time range.

When the moving averages are plotted next to the daily or weekly share price movements, the volatility and jumpy nature of these price movements cancels out. The ironing out of the financial instruments price volatility leaves out a clear trend that is not only meaningful but also one that can be followed by the trader.

The moving average lines have been used by many traders in decision making. For instance some would not invest unless the daily stock price steers clear above the 200 day moving average line; while to others albeit the risk taking category, close proximity of the stock prices to this line is sufficient to initiate a trade.

The significance of the 50 day and 200 day moving averages in trading is at the point where the two lines cross. The 200 moving average which moves a bit slowly can give a signal for trader to go long when crossed above by the 50 day moving average. Inversely when crossed below, it gives clues for the momentum traders and investors to go short. Some financial market experts developed the 350 day moving average which works to boost the reliability of the 50 and 200 day moving averages.

52 WEEKS HIGHS AND VARIATIONS

 

This indicator has produced varying results over different holding periods. A stock generally attains several highs and several lows in the course of a trading period. This indicator is powerful in that it brings into focus a whole year of trading (52 weeks).

In the game of trading, research has established that investing in financial instruments making new 52 weeks highs and shorting those that are not has successfully produced earnings of up to sixty percentage points a month. This is when a six month period is considered; when considering an even shorter time period, the results are not only strong but also impressive.

RELATIVE STRENGTH

A stock or financial instrument when considered in isolation may not reveal much concerning its attributes amongst them price movement. Relative strength as a momentum indicator therefore compares or rather shows the difference in price movement of a stock vis-à-vis that of the market. This being a relative measurement attribute, it is not surprising to find it assuming positive values even in the case where the stock price under consideration is falling.

The simple calculation here is that the market could have fallen further compared to the stock under observation. This measure unlike its absolute strength counterpart can help financial market participants pick instruments that clearly outperform the market even if their price movement has taken a dip.

Trading experience has shown that relative strength and the other two momentum indicators discussed have shown consistency over time of usage and application.

This is indeed what makes them ranked to among the rest.