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Nov 20 2009

Identifying Extremes

Posted by admin in Financial market

An equally popular and more interesting interpretation of the momentum chart is based on an analysis of tops and bottoms. All momentum values are bounded in both directions by the maximum move possible during the time interval represented by the span of the momentum. The conditions at the points of high positive and negative momentum are called overbought and oversold, respectively A market is overbought when it can no longer sustain the strength of the current trend and a downward price reaction is imminent; an oversold market is ready for an upward move. Faster momentum calculations win reach these maximum values more often and stay there for extended periods of high upward or downward momentum. The use of a slow momentum period, however, will produce values that rarely test its limits. If the momentum system uses the horizontal zero line to enter and exit trades, it is of no consequence how often the bounds are touched; once a position is entered, the high-momentum condition serves as a positive reinforcement for the trade. However, the maximum positive and negative momentum values can be measured and used to anticipate the end of a trend. For this purpose, momentum values that are too fast will obscure the trading signalsthe momentum index must be allowed to reach its full value.