Momentum indicators in the financial markets

What is a momentum indicator in the financial currency markets?

Well these are measures that are used to indicate the amount of change there has been in prices, or more specifically the rate of change in those prices, and therefore it can help to show when the market has gone too far one way or another.

When there is an extreme such as this identified, it is known as the market having overbought or having oversold - for obvious reasons!

The measure is worked out based on the percentage change in price based on the price of a month ago or some other period - but a month is a standard.

Clearly this is a useful indicator as what happens is that where the price goes up beyond historical thresholds then it shows that the market will probably tend to come back down, or correct back, and so on in the other direction, because if it going outside historical limits then this probably shows there needs to be a correction.

That said sometimes there can be a precedent set where new territory is genuinely entered with regard the financial market movement on that currency.

When this occurs it is due to something quite basic and fundamental which has resulted in that change in the price level generally, this is sometimes called a paradigm shift.

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