Community Submission - Author: Anonymous
The term market momentum refers to the ability of a particular market to maintain a continuous increase or decrease in price within a certain timeframe. Essentially, market momentum is what creates a market trend. Since the market momentum is a result of the variations in the market price of an asset, it also reflects the current market sentiment.
As such, market momentum can be used in technical analysis (TA), helping traders identify trading opportunities. These opportunities may arise during bullish or bearish trends (when market momentum is getting stronger) or during reversal points (when market momentum is getting weaker).
However, market momentum is not only related to the price changes but also to the trading volume. This means that high volumes of trading activity indicates a stronger market trend and, thus, a stronger and more reliable market momentum.
A general equation that is often used to calculate or define the market momentum is:
Market momentum = (current price) - (closing price of past n days).
As mentioned, many traders and chart analysts make use of TA indicators to measure market momentum and try to spot possible market trends. Some examples of these tools include the Relative Strength Index (RSI), the Stochastic RSI, the Volume Weighted Average Price (VWAP), and the Moving Average Convergence Divergence (MACD).
There are also specific indexes created to measure market momentum within various market sectors. MSCI and FTSE Russell are two companies that have introduced momentum indexes: MSCI USA Momentum Index and the Russell 1000 Momentum Focused Factor Index.