Trend vs. Momentum
Understanding the two fundamental questions of technical analysis: Where is the market going, and how fast is it getting there?
Trend Indicators: Charting the Course
Trend indicators are the compass of the market. Their primary purpose is to smooth out price volatility to clearly identify the prevailing direction of a security. They answer the question, "Which way is the market going?" By analyzing historical price data, these tools confirm whether a market is in an uptrend, downtrend, or moving sideways. They are lagging indicators, designed to filter out market "noise" and confirm a trend once it's established.
Moving Averages (MA)
The bedrock of trend analysis. A rising MA indicates an uptrend; a falling MA signals a downtrend. The EMA gives more weight to recent prices, making it more responsive than the SMA.
Formula
EMA = (Close - EMA_prev) * (2 / (N + 1)) + EMA_prevParabolic SAR
Provides a dynamic, trailing stop-loss level that follows the price. Dots below the price are bullish; dots above are bearish. A flip in position signals a potential reversal.
Formula
SAR_new = SAR_old + AF * (EP - SAR_old)Average Directional Index (ADX)
A unique meta-indicator that measures the strength of a trend, not its direction. A reading above 25 suggests a strong trend (either up or down), while a reading below 20 indicates a weak or non-trending market.
Formula
ADX is the smoothed average of the absolute DI difference.Momentum Indicators: Measuring the Force
If trend indicators are the compass, momentum indicators are the speedometer. They measure the speed or velocity of price changes, answering the question, "How strong is the current move?" They gauge the force behind a price movement and are generally considered leading indicators because momentum often slows down *before* the price changes direction, providing early warnings.
Relative Strength Index (RSI)
Measures the speed and magnitude of price changes on a scale of 0-100. Readings above 70 are 'overbought,' and below 30 are 'oversold.' Divergence between price and RSI is a powerful reversal signal.
Formula
RSI = 100 - [100 / (1 + (Avg Gain / Avg Loss))]Stochastic Oscillator
Compares a closing price to its price range over a period (0-100). It's based on the idea that in an uptrend, prices tend to close near their highs. Readings >80 are overbought, <20 are oversold.
Formula
%K = 100 * [(C - L14) / (H14 - L14)]Rate of Change (ROC)
A pure momentum oscillator that measures the percentage change in price from one period to the next. A cross above the zero line is a bullish signal, while a cross below is bearish.
Formula
ROC = [(Close - Close_n) / Close_n] * 100The Hybrid: MACD
The Moving Average Convergence Divergence (MACD) is a special case, often considered both a trend and a momentum indicator.
- Trend Component: It's built from the difference between two moving averages (typically 12 & 26-period EMAs).
- Momentum Component: The MACD Histogram visualizes the acceleration of momentum by plotting the difference between the MACD line and its 9-period EMA (the 'signal line').
Moving Average Convergence Divergence (MACD)
A versatile tool showing the relationship between two EMAs. A bullish signal occurs when the MACD line crosses above its signal line. The histogram shows the strength of momentum.
Formula
MACD = EMA(12) - EMA(26)Core Differences: At a Glance
| Feature | Trend Indicators | Momentum Indicators |
|---|---|---|
| Primary Question | Which direction is the market heading? | How strong and fast is the current move? |
| What It Measures | The general direction and smoothed path of price. | The rate of change (velocity and acceleration) of price. |
| Typical Classification | Lagging: Confirms a trend after it has started. | Leading: Anticipates potential trend reversals. |
| Chart Placement | Often overlaid directly on the price chart. | Typically plotted in a separate window below the price chart. |
| Primary Signal Type | Crossovers (e.g., price over MA). | Overbought/Oversold levels and Divergence. |
| Best Use Case | In clearly trending markets. | Identifying potential turning points and pullbacks. |
| Primary Weakness | Prone to false signals ("whipsaws") in sideways markets. | Can give premature signals in strongly trending markets. |
| Example Indicators | Moving Averages (SMA, EMA), Parabolic SAR, ADX. | Relative Strength Index (RSI), Stochastic Oscillator, ROC. |
Strategy Blueprints
Strategy 1: MA + RSI for Pullback Entries
This strategy uses a trend indicator (Moving Average) to define the overall direction and a momentum indicator (RSI) to time entries during pullbacks.
- Trend Filter: Use a long-term MA (e.g., 200-day EMA). If price is above it, only look for buy signals.
- Entry Trigger: In an uptrend, wait for the RSI to dip into an oversold or pullback zone (e.g., below 40).
- Signal: Enter a buy trade when the RSI turns back up, suggesting the pullback is over and the main trend is resuming.
Strategy 2: ADX + MACD to Avoid Whipsaws
This strategy uses the ADX to measure trend strength, acting as a filter for signals from the MACD (a hybrid indicator).
- The Problem: MACD crossovers work well in trends but give many false signals in sideways markets.
- Trend Strength Filter: Use the ADX. Only consider MACD signals if the ADX is above a threshold (e.g., 25), confirming a strong trend exists.
- Execution Logic: Ignore all MACD signals if ADX is low (e.g., below 20), as the market is likely trendless.