Momentum

The word carries two meanings that are usually left unseparated. As an indicator, momentum is a specific calculation: the current price minus the price a stated number of bars ago, or the ratio between them expressed around one hundred. As a market description, momentum names the observation that a series which has moved in one direction over some period has historically tended to continue over the period immediately following, an effect documented across markets in academic work and disputed as to its size, its persistence and its causes.

The calculation has one parameter, the lookback, and it does most of the work. A short lookback produces a fast, noisy reading that changes sign frequently; a long one produces a smooth reading that changes sign late. Every other momentum family instrument is a variation on the same idea: MACD measures the distance between two averages, and rate of change measures the same difference as a percentage. None of them contains information the price series does not already contain.

Two properties are frequently misread. Momentum has no fixed scale unless it is explicitly bounded, so a reading is comparable with the same instrument's own history and with nothing else. And a falling momentum reading does not mean a falling price: it means the price is rising more slowly than it was, which is a statement about the second derivative. Practitioners disagree about whether that deceleration says anything about what follows, and the published evidence differs by market and by period.