What is market momentum?

What is market momentum?

Market momentum is the tendency of a trend to continue in one direction or another. Various analysis methods and indicators seek to identify the strength of trends and to find points of possible reversals and retracements.

A market has strong momentum when trading volume is up and confirms the direction of price movement in the market. Bullish or bearish market sentiment will influence the degree of momentum that is present.

Indicators such as the Relative Strength Index (RSI) and Stochastics, as well as several other popular indicators and tools, are focused on quantifying the momentum present in the market.

Fibonacci Retracements, for example, are pullbacks that do not overcome the momentum of the larger trend, and some traders use Fibonacci analysis software, which is somewhat based on the mathematics of fractals and the physics of waves, to identify where these retracements might occur. Elliott Wave Theory is a similar field of study and analysis.

Some traders base their invest strategy on riding the waves of momentum, and this is called momentum investing. They hop onto a bandwagon when momentum is high, and jump off when momentum runs out.

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