Definition of Momentum

WHAT DEFINES MOMENTUM?      

The close is the assigned value for any market. The law of physics that states “a body in motion tends to stay in motion until a force or obstacle stops or changes that motion” really applies to this concept, because higher assigned values can and do usually attract more buying and even new buyers. That is what momentum is and why it is the key in trading. Think of what an auction is like. There is excitement. People are furiously bidding up the price of an object. It attracts more buyers. Gosh, it even attracts people to bid on items they don’t even want. Then as value has peaked, the bidding dries up; and the last person with the highest bid is awarded the item (or stuck buying the high). Trading is essentially the same if you know when it’s the right time or price level to enter the market and what signals to look for to exit a trade.

There are all kinds of traders, and each one uses different forms of analysis. What I teach short-term stock, forex, and futures traders is that there is immediate equal access to the four common denominators that each and every trade has to work with, without prejudice and exclusivity: (1) the open, (2) the high, (3) the low, and (4) the close. For stock traders, there is a fifth element: volume. Fugures traders who are longer term or who like to confirm the strength or the weakness of a trend should also be concerned with volume. In futures, unlike in stocks, the volume is not given to the investing public in real-time intraday. Truthfully, that is why the futures and forex markets depend on technical analysis to speed the analytical process to determine a market move on pure price action. After all, it is how we analyze, interpret, and act on the information that makes us different as traders. As for forex, we do not have a means to measure volume as discussed previously. Therefore, it is wise for a forex trader to learn how to borrow information from the futures markets.