Chasing Market Momentum

In today’s article, we explore the basics of Market Momentum and Momentum Analysis. Momentum analysis is one of the ways traders used to determine which trades to take.  While it is not the only way to confirm a trade, it is a technique we use for certain trading environments. But, what does it all mean? Market Momentum is the ability of the market to sustain change in market prices. This could be either negative or positive change in price.  We define this ability by comparing two things.  The amount of change in price level vs. trading volume in a specific period of trading. Increasing price levels and volume of orders being placed during a specific time period could confirm upward momentum in the markets. There is some debate as to what causes this movement in the markets. Some Market participants insist that momentum in the markets is an anomaly caused by irrational traders. As price rises, other traders feel the need to jump in on what appears to be upward movement. This, in turn, causes prices to rise higher. This will continue until supply exceeds demand, causing prices to reverse. One way to determine the momentum in technical analysis is to look for confirmations in velocity. The velocity of money is defined as the number of times money turns over in any given period. Velocity increases as we see more trades taking place during a specified period of time. If we see velocity lining up with and confirming our position in momentum, this helps us determine how and when prices may change. We identify price exhaustion by measured moves on the Velocity Histogram from multiple timeframe velocity cycles. These price exhaustion areas indicate where contracts are overbought or oversold. In an overbought or oversold area, the asset becomes vulnerable to a price reversal. For example, as price increases to an overbought area, all those who wanted to buy an asset/contract likely already have it, causing an imbalance in supply & demand. In this scenario, this can lead to selling pressure on the asset. At NeuroStreet we use both Velocity Histograms and Bollinger Bands to confirm our momentum trading with our newly upgraded VelocityMomoDiv indicator. You can watch one of our live trades below to get a better idea of how we use these in a live environment.