Momentum in the stock market refers to the rate a stock’s price is rising or falling. In physics, an object in motion remains in that state until an applied external force stops it. Stock prices behave much the same way. When a stock price is rising, it continues to rise until selling pressure becomes sufficient to stop or reverse the rise. Investors can use several important chart indicators exist to measure a stock’s momentum.

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Momentum and Crowd Psychology

Investors oftentimes behave like a school of fish. Though fish do not have a leader, they swim together in unison. Investors also follow each other, buying when others are buying and selling when others are selling. This behavior creates price momentum in a stock. For example, as stock prices rise, investors become more confident that the price will continue to rise, so they buy more at higher and higher prices, causing momentum to accelerate. At some point, however, higher prices will become attractive to sellers, who will exert pressure, causing momentum to slow and eventually stop or reverse.

Rate of Change

The rate of change, or ROC, indicator is sometimes just referred to as momentum. Momentum measures the price percentage increase or decrease in relation to time. Typically, when the price is rising, the momentum line on the graph will also rise. If the price is rising and the momentum line does not rise, it can indicate momentum is slowing.

Divergences

References

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