Understanding of Momentum

The Concept of Overbought and Oversold

• PE (Price / Earning ratio): reasonable if 10 ≤ x ≤ 25. overpriced if x > 25

• Index: bullish if 50 ≤ x ≤ 70, bearish if 30 ≤ x ≤ 50

• Momentum is a lagging indicator

Moving Averages

• MA is a lagging indicator

• The convergence and crossover of two MAs adds value and create confirmation value when compared to momentum trends

• The best MA: 50 days and 200 days

Crossover

• MAs cross one another as a factor of price change.

• Significance: momentum of change (convergence), proximity to resistance or support, and proximity of MA to current price

• Most reversal activity takes place at or near resistance or support

• MA is a lagging indicator but together with price above or below Bollinger Bands it can predict the price movement

RSI: Relative Strength Index

• the least complex and easiest to interpret

• an excellent system for timing or reversal

• Usually remain 30 ≤ x ≤ 70 range

embed