Momentum Oscillators

Momentum refers to the velocity or rate of change of a security's price. Momentum indicators are commonly referred to as oscillators because they fluctuate above and below an equilibrium line. These tools compare price changes across periods to measure whether a rising or declining trend is accelerating or decelerating.

Key Momentum Oscillators

1. Relative Strength Index (RSI)

Developed by J. Wells Wilder in 1978, the RSI is a popular momentum oscillator that compares the average price change of bullish bars with the average change of bearish bars.

  • Calculation Basis: Compares the average up day closes (U) versus the average down day closes (D). An up day has a close higher than the previous day's close; a down day has a lower close.
  • Default Parameter: 14 periods (adjustable for sensitivity).
  • Range and Equilibrium: Fluctuates between 0 and 100, with 50 as the equilibrium level.
    • RSI above 50: Upward momentum increases.
    • RSI below 50: Downward momentum increases.
  • Extreme Conditions:
    • Overbought: RSI moves above 70.
    • Oversold: RSI moves below 30.

2. Intraday Momentum Index (IMI)

Developed by Tushar Shande, the IMI is a crossbreed between the RSI and candlestick analysis. It uses the relationship between opening and closing prices to differentiate between bullish and bearish periods.

  • Calculation Basis: Separates bullish and bearish candlesticks and performs an RSI calculation based on the candle bodies (Close minus Open).
  • Example Calculation (Conceptual): Counts the total "bullish points" (Close > Open) and "bearish points" (Close < Open) over the lookback period and applies an RSI-like formula.
  • Default Parameter: 14 periods (adjustable).
  • Range and Equilibrium: Fluctuates between 0 and 100, with 50 as the equilibrium level.
    • IMI above 50: Upward momentum increases.
    • IMI below 50: Downward momentum increases.
    • IMI at 50: Green points equal red points.
  • Extreme Conditions:
    • Overbought: IMI moves above 70.
    • Oversold: IMI drops below 30.

3. Price Rate of Change (ROC)

The ROC indicator is a pure momentum oscillator that measures the percentage change in price from one period to the next.

  • Calculation: Compares the current closing price to the closing price X periods ago.
  • Relationship to Momentum Oscillator: ROC is identical to the standard momentum oscillator, but normalized.
  • Equilibrium: 0 (zero level).
    • ROC oscillates above or below 0.
    • The normalized momentum oscillator fluctuates around 100.
  • Default Parameter: 21 periods (representing one month).
  • Interpretation (Centerline Crossover):
    • ROC expands into positive territory: Advance accelerates.
    • ROC dives into negative territory: Decline accelerates.
  • Extreme Conditions: Traders identify visual levels that caused previous turning points to define future overbought/oversold areas.

4. Stochastic Oscillator

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator compares a security's closing price relative to its price range over a given time. It tracks the speed or momentum of prices, not price or volume directly.

  • Calculation Formula: (Current Close - Lowest Low of Period) / (Highest High of Period - Lowest Low of Period) * 100
  • Types of Stochastic:
    1. Fast Stochastic (%K): The initial plot resulting from the formula, often choppy.
    2. Slow Stochastic (%K): A smoothed X-period simple moving average (SMA) of the Fast %K.
    3. %D Line: An X-period SMA of the Slow %K.
  • Default Parameters: 5 (Fast %K), 3 (Slow %K), 3 (%D).
  • Range: Fluctuates between 0 and 100.
    • Readings above 80: Price is near its high for the period.
    • Readings below 20: Price is near its low for the period.
  • Extreme Conditions:
    • Overbought: %K moves above 80.
    • Oversold: %K drops below 20.

5. Commodity Channel Index (CCI)

Developed by Donald Lambert in 1980, the CCI is a versatile indicator used to identify the beginning of a new trend or warn of extreme conditions.

  • Purpose: Measures the current price level relative to an average price over a given period.
  • Calculation Steps:
    1. Calculate the Typical Price ((High + Low + Close) / 3).
    2. Calculate the 20-period Simple Moving Average (SMA) of the Typical Price.
    3. Subtract the SMA from the Typical Price and divide the result by a constant (0.015) times the Mean Deviation.
  • Default Parameter: 20 periods.
  • Equilibrium and Interpretation: Fluctuates above and below the zero level.
    • Surges above +100: Reflects strength, potentially signaling the start of an uptrend.
    • Plunges below -100: Reflects weakness, potentially signaling the start of a downtrend.
  • Extreme Conditions: Chartists may look for overbought/oversold conditions around +200 or -200, though extreme levels may vary as CCI is an unbound oscillator.

Detailed Summary

Momentum indicators, often called oscillators, measure the rate of change in a security's price by comparing price movements across different periods to determine if a trend is accelerating or decelerating. The text details five key momentum oscillators: the Relative Strength Index (RSI), which compares bullish and bearish price changes (0-100 range, 50 equilibrium); the Intraday Momentum Index (IMI), a variation combining RSI and candlestick analysis (0-100 range); the Price Rate of Change (ROC), a pure measure of percentage price change (0 equilibrium); the Stochastic Oscillator, which compares closing price relative to its recent range (0-100 range); and the Commodity Channel Index (CCI), which identifies new trends or extreme conditions and is unbound but uses 0 as equilibrium.

Key Takeaways

  • Momentum Oscillators measure the velocity or rate of price change and fluctuate around an equilibrium line.
  • The Relative Strength Index (RSI), developed by J. Wells Wilder, compares average up closes vs. down closes over 14 periods (default). Its range is 0-100, with 50 equilibrium, and 70/30 defining overbought/oversold.
  • The Intraday Momentum Index (IMI) combines RSI with candlestick analysis, focusing on the relationship between open and close prices (candle bodies). Its interpretation (0-100 range) is similar to RSI.
  • The Price Rate of Change (ROC) is a pure momentum oscillator measuring the percentage change between the current close and a past close (default 21 periods), fluctuating around 0.
  • The Stochastic Oscillator, developed by George C. Lane, tracks price momentum by comparing the closing price relative to its high/low range over a period, yielding Fast %K, Slow %K, and %D Line (80/20 define extremes).
  • The Commodity Channel Index (CCI) identifies new trends by measuring price level relative to an average price. It is typically unbound but uses 0 as equilibrium, with +100 and -100 often signaling strong trend acceleration.