InvestorQ : Can you explain how exactly this indicator works?
rhea Babu made post

Can you explain how exactly this indicator works?

2 years ago

One thing that needs to be remembered is that Momentum Oscillators do not have an upper and lower range to identify overbought and oversold zone. Hence the range is more visual than factual. Unlike the typical Since the Momentum indicator does not have an upper and lower boundary you must visually inspect the history of the momentum line and draw horizontal lines along its upper and lower limits? When the momentum line reaches these levels it may indicate that the stock may be overbought or oversold.

That is why the Momentum oscillator is also called unbound oscillator, meaning there is no upside or downside limits. Hence there is a lot of subjectivity that is involved in momentum. This makes interpreting an overbought or oversold condition subjective. When the Momentum indicator is overbought the security can continue to move higher. When the Momentum indicator is oversold the security can continue lower as well. Ideally, you can use the momentum oscillator as a standalone measure and it must be used in conjunction with other measures. Use the Momentum indicator in conjunction with additional indicators or price analysis when attempting to read overbought or oversold conditions. Here are some basic interpretations of the momentum oscillator.

Crossing above the zero line during an uptrend would be a buy signal and a crossing below the zero line during a downtrend would be a sell short signal. When using these signals users generally trade in the direction of the overall trend. Also it is suggested that you ratify these signals with additional indicators before taking a trade decision since a subjective approach like momentum oscillators can at times be vulnerable to decision deficit syndrome.