The momentum value is a smoothing of price changes and can be very similar to a standard moving average. Most applications use momentum as a substitute for a price trend. BY looking at the net increase in prices over the number of days designated by an n-day momentum indicator, intermediate fluctuations are ignored, and the pattern in price trend can be seen. The longer the span between the observed points, the smoother the results. This is equivalent to faster and slower moving averages.
To use momentum as a trend indicator, the momentum span is selected and plotted. A buy signal occurs whenever the value of the momentum turns from negative to positive, and a sell signal is when the opposite occurs. If a band is used to establish a neutral position or a commitment zone, it should be drawn around the horizontal line representing the midpoint momentum value, usually zero. Buy and sell signals that occur sooner and are likely to be stopped out more often, use a signal line created by smoothing the momentum values, in this case using a simple 3-day moving average. Once the momentum value moves above a threshold level of, for example, 70, a sell occurs when the momentum crosses below the signal line. The position may he stopped out when the momentum crosses above the signal line, or when momentum moves above its entry level.
To find the best choice of a momentum span, a sampling of different values could be tested for optimum performance, or a chart could be examined for some natural price cycle. Identify the significant tops and bottoms of any bar chart, and average the number of days between these cycles, or find the number of days that would closely approximate