The Complete Guide to Momentum Oscillators

The momentum oscillator is a technical tool that issues a signal when a price move or trend is about to start. It can fluctuate between an upper and lower band or across a zero line, highlighting relative strength or weakness within a specific time frame. Many oscillators generate values between zero and 100 while band placement near those extremes denotes ‘overbought’ or ‘oversold’ conditions that raise odds for a reversal. They can also feature multiple lines that generate signals when ‘crossing over’. Strongly-trending securities can get overbought or oversold and stay that way for long periods.

These are forward-looking indicators rather than trend-following indicators, with crossovers and reversals at band extremes often defining pauses in the broader trend, rather than trend reversals. These types of indicators generate the most potent buy and sell signals when looking for convergences or divergences within a set of time frames, like monthly, weekly, and daily charts. They can also issue potent trend breakout and reversal signals when used in conjunction with moving averages and other lagging indicators that apply moving averages to create values.

An oscillator can generate useful guidance when the underlying trend isn’t clear and the trader focuses on buy or sell ‘cycles’, as opposed to ‘signals’. The reasoning is easy to understand. A buy cycle doesn’t necessarily translate into higher prices while a sell cycle doesn’t necessarily translate into lower prices. However, cycle alternation often foretells the transition from a trend into a trading range, and vice-versa. It can also predict when the established trend’s trajectory is going to increase or decrease.

Stochastic Oscillator

The Stochastic oscillator was developed by George Lane in the 1950s. It’s become hugely popular since that time due to a high degree of accuracy in determining when it’s a good time to buy or sell a security. The indicator looks at an instrument’s closing price and compares that value to the price range over a specified time period. The ability to close higher within those values lifts the Stochastic to a higher number between zero and 100. A security typically enters the overbought zone when above 80 and the oversold zone when below 20. The 5-smoothed or 5-3-3 Stochastic setting is highly effective for position and swing trading.

The Stochastic generates two lines, a lead line and a signal line that ‘crosses over’ when certain conditions are met. Use this indicator to determine if a security is engaged in a buy or sell cycle within the time period under examination. The indicator’s power of prediction grows geometrically when comparing buy and sell cycles in multiple time frames. For example, a security engaged in a monthly Stochastic buy cycle may also be engaged in a weekly Stochastic sell cycle. Correct interpretation when these types of cycles are in conflict can generate excellent trade entry and exit timing, as well as windfall profits.

Relative Strength Index

Welles Wilder Jr. introduced the Relative Strength Index (RSI) in 1978. RSI examines the characteristics of recent price change to evaluate momentum and to identify overbought or oversold readings that predict cycle reversals. Like other oscillators, RSI fluctuates between zero and 100, with a reading above 70 typically denoting an overbought security while a reading below 30 typically denotes an oversold security.  Unlike Stochastic, RSI generates just a single value that changes in reaction to the latest price bar.

RSI is constructed by looking at a computation in which average gains are divided by average losses over a specified period. 14 (days, weeks, or minutes) is the indicator’s most popular setting. The plot is placed below the price chart, generating a convergence when top and bottom panels move in the same direction and a divergence when moving in opposite directions. A rising RSI when price is falling marks a bullish divergence that often works well with a pullback strategy while a falling RSI when price is rising marks a bearish divergence that can support all sorts of profitable short sales.

Money Flow Index

Money Flow Index (MFI) looks at price and volume to identify overbought and oversold conditions. The indicator oscillates between zero and 100, rather than carving a traditional pattern.  As with RSI, MFI generates convergence-divergence signals when comparing the trajectories of price and indicator, with divergences often producing the most profitable buy or sell signals. In addition, the calculation looks at volume’s contribution to price action, encouraging technicians to call it the ‘volume-weighted RSI’. MFI hits overbought above 80 and oversold below 20 and, like RSI, 14 (days, weeks, or minutes) is the most popular setting.

MFI separates up days from down days, measuring volume generated by those sessions. Indicator plots are characterized as “Positive Money Flow’ when rising and ‘Negative Money Flow’ when falling, often matching up well with accumulation-distribution indicators.  For example, falling volume while price is rising above the overbought level can turn the MFI lower, generating a bearish divergence that warns about an imminent reversal. The indicator works best when used in conjunction with pattern analysis, looking for instances when a higher high or lower low in one plot isn’t matched by the other plot.

Price Rate of Change

Price Rate of Change (ROC) measures momentum by looking at the percentage change in price between the current bar and a specified prior period. Unlike other oscillators, the ROC indicator plot starts at a central zero line and moves into positive or negative territory, depending on price movement over the examined period. In addition to generating convergence and divergence data, crossovers through the zero line also elicit buy and sell signals. ROC values are unbounded, meaning they can go well above 100 or well below -100. As an example, Gamestop ROC reached 1,800 during the historic 2021 short squeeze.

A rising ROC above the zero line confirms an uptrend within the applied setting while a falling ROC below the zero line confirms a downtrend. Rangebound price action generates ROC oscillation around the zero line, limiting its usefulness. In addition, signals only apply to the time period under examination and different settings always produce different signals. Signals also change when looking at different chart intervals, like daily, 60-minute, or 15-minute views. As a result, comparisons between intervals also generate convergence and divergence that requires interpretation. Many platforms default to a 14 ROC setting but 9 and 25 have also grown popular in recent years.

Commodity Channel Index

Commodity Channel Index (CCI) evaluates trend direction and strength, generating a plot that market technicians use to identify the best times to enter or exit a position. CCI also works well as a trade filter, identifying dull markets when it’s best to stand aside. The indicator examines the difference between the current price and an historical average price set by the technician. 20 periods is a popular setting. A CCI above zero indicates the current price is above the historic price while a negative CCI indicates the current price is below the historic price.

Unlike RSI and Stochastic, CCI values are unbounded and can go above 100 or below -100, making arbitrary overbought and oversold bands less useful for signal generation. As a result, the technician needs to compare current CCI extremes to prior turning points, which will change from asset to asset. As with other momentum oscillators, CCI can diverge from price, signaling potential weakness in an uptrend and potential strength in a downtrend. Pullback strategies often work well in timing long and short entries into these divergent conditions.

Additional Momentum Oscillators

Awesome Oscillator – evaluates momentum to determine if bulls or bears are controlling price action of a security.

Center Of Gravity – is a forward-looking indicator that generates crossovers to identify high odds turning points in rangebound markets.

Chande Forecast Oscillator – measures the percentage difference between a closing price and a linear regression line over a specified time period. An oscillator reading above zero predicts higher prices while an oscillator reading below zero predicts lower prices.

Chande Momentum Oscillator – subtracts the sum of losses over the specified time period from the sum of gains over the specified time period, and divides the total by the sum of all price movement over the specified time period.

Coppock Curve – calculates a 10-month weighted moving average of the sum of the 14-month and 11-month rates of change of an index to determine long-term momentum.

Disparity Index – evaluates the current price of a security in relation to a moving average.

Ease of Movement – is a volume-weighted indicator that gauges how easily price moves up or down through a formula that subtracts the prior average price from the current average price and divides the difference by volume.

Ehler Fisher Transform – isolates price movement to determine when a security hits an extreme, raising odds for a reversal.

Elder Force Index – quantifies the relative power needed to move price by comparing current price to prior price and multiplying by trading volume during the period.

Elder Impulse System – combines trend-following and momentum data to identify inflection points where a trend is likely to accelerate or slow down.

Fractal Chaos Oscillator – seeks to determine the choppiness or trendiness of a security, returning to zero in choppy conditions and hitting +N and -N extremes in trending conditions.

Intraday Momentum Index – combines candlestick and relative strength data to determine when a market is overbought or oversold.

Market Facilitation Index – measures the strength or weakness of price movement, seeking to determine if an uptrend or downtrend will persist or reverse.

Momentum Indicator – evaluates the strength or weakness of price movement over time, seeking to identify high odds reversal signals.

Pretty Good Oscillator – measures the distance of the close from the specified simple moving average, modified by the average true range over the same period.

Price Momentum Oscillator – applies smoothing calculations to Price Rate of Change to determine relative strength and weakness.

Price Oscillator – calculates the difference between pre-chosen moving averages, looking for overbought-oversold and convergence-divergence signals.

Price Volume Trend – looks at directional movement and trend intensity through a cumulative plot that multiplies volume by price percentage change over a given period.

Prime Number Oscillator – identifies high odds turning points by taking the prime number closest to the current price and calculating the difference between the nearest prime numbers across a specified time period.

Pring’s Know Sure Thing – interprets price rate-of-change data through a plot that identifies overbought or oversold extremes.

Pring’s Special K – evaluates trend intensity in multiple time frames to build a comprehensive view of asset cyclicity. It is primarily used to identify reversals before they unfold and to locate high odds entry/exit levels.

Psychological Line – computes the ratio of rising price bars to the total number of price bars over the specified time period. A reading above 50% indicates bulls are in control while a reading below 50% indicates bears are in control.

Relative Vigor Index – measures trend strength by contrasting the closing price to the trading range over a specified time period.

Stochastic Momentum Index – refines the Stochastics oscillator, applying a broader range of price settings and placing more weight on closing prices.

Ultimate Oscillator – applies weighted moving averages in multiple time frames to measure momentum.

Valuation Lines – calculates and displays the average of visible prices by applying multiple standard deviations.

Williams %R – measures trend momentum over the specified time period by drawing an oscillator bounded by 0 and 100.