How to Use Technical Indicators
Understanding the MTM Indicator
The MTM, or momentum indicator, is a technical analysis tool designed to study the short to medium-term fluctuations of stock prices. In the securities market, there's a phenomenon akin to the "constant velocity principle" in physics: if a stock’s upward (or downward) trend continues, its rate of ascent (or descent) tends to remain consistent. The momentum indicator (MTM) is derived from this principle, examining the speed of a stock's price changes to analyze trends.
How to calculate MTM value
Momentum (MTM) formula:
MTM = Closing Price_today - Closing Price_N days ago, where N is typically defaulted to 12.
Momentum Average (MTMMA) formula:
MTMMA = Average of the MTM values over the past M days, where M is typically defaulted to 6.
How to use MTM indicator
A downward price trend is suggested when the MTM line crosses below the zero mark from above. On the flip side, an upward price trend is indicated when the MTM line crosses above the zero mark from below.
If the MTM line and price are both rising, it hints at a potential short-term price increase. Conversely, if both are falling, a short-term price decrease may be on the horizon.
Divergence occurs when the price and MTM lines move in opposite directions. If the price reaches a new high during an uptrend but the MTM does not, this bearish divergence could mean the uptrend is losing steam. Similarly, bullish divergence occurs if the price hits a new low during a downtrend, but the MTM doesn't follow, a sign that the downtrend may be running out of momentum.
The relationship between the MTM line and its average also offers insights. When both are above zero and the MTM is above its average, it implies increasing upward momentum. But if the MTM falls below its average, be wary of a potential trend reversal. If both lines are below zero and the MTM is below its average, the downward momentum is likely increasing. Should the MTM cross above its average, it may signal a potential price recovery.
Remember, the MTM indicator is most effective when used alongside other tools for a comprehensive analysis. It's not a standalone signal, but rather a component that can enhance decision-making when combined with broader market analysis.
