Momentum is the final technical analysis indicator that we wrote about in the article you just read, and it is still one of the most important. And of all the momentum indicators, it is probably the Relative Strength Index (RSI) that is the most useful. This compares how a security is doing now compared to how it was when comparing it to the historical data. And speaking of relative strength, it’s not just the number calculated that really tells you where a security may be trading in future. You should also pay attention to Relative Strength in terms of how a security is doing compared to the overall market, or compared to the overall sector.
Consider, for example, if a certain Solar stock is trading in an extremely bullish manner, breaking new highs and continuing to go up day after day. But how should that be interpreted if the Solar industry as a whole is weak, and every other stock in that sector is going down? In that case, you would have reason to be slightly worried, as it would seem there is a good change that the one bullish stock may soon go back to trading like the rest of the sector. So relative strength is something that is often worth considering.
And when it comes to momentum as a whole, it is worth comparing it to all of the other technical indicators including trend, volume and volatility. All of these together should help you to make more educated decisions when it comes to deciding on whether to invest in a security or not.
Momentum is also similar to volume in that you want it to be as great as possible. Just like with volume, if there is no momentum, it means a stock is not really trading. So if you are making investment decisions based on technical analysis, try to pick stocks that tend to have fairly high momentum. That even applies regardless of if you intend to buy a stock or short it.