One of the most commonly used indicators in the field of technical analysis is the momentum which is also called Momentum Trade. By the momentum the speed and the strength of a price movement can be represented graphically. If a trend loses (clearly) momentum this is often a trading signal.

How does the momentum work as an analysis method?

The Momentum is an analysis method that can be used in many financial products. In addition to stocks, futures and traditional options it is also used by speculators who trade Binary Options. On what basis does the momentum function can be illustrated well with the image of a bungee jump. After a bungee jump it is well known that the momentum of the swing/jump is the biggest in the first few seconds after take-off. By further swinging of the rope the momentum wanes until finally the jumper comes to standstill. Applied to the analysis method of momentum the decreasing of the momentum is a trading signal for the chartist. The momentum and a possible trend reversal are thus in association with each other and the trend reversal may be derived from a change of momentum.

The actual trading signal which may result from the momentum is the inverse movement. To bring it back to the bungee jump that would be the case after the jumper has reached the lowest point of the jump. The question now is what conclusions the speculator can get from the various forms of momentum. Basically there are four main scenarios: If the momentum is negative and falling that would mean that an already existing downward trend is further accelerated. If the momentum is negative and ascending that would mean that the downtrend is getting stopped. This would be a trading signal and in that case a buy signal. These two scenarios can also exist at rising prices. If the momentum is positive and rising the upward trend is strengthened. If the momentum is generally positive but declining it could speak for a braked uptrend and thus trigger a trading signal (sale).