Momentum Indicator: Two Closes Subtracted
The momentum indicator is today's closing price minus the closing price a fixed number of bars ago, plotted as a line. Almost every oscillator in common use is a smoothed or rescaled version of this calculation, which is why they all move together.
Covered on this page: TradingView.
How it works
Take today’s close. Subtract the close from ten bars ago. Plot the answer. That is the entire indicator.
Some platforms show it as a ratio instead — today’s close divided by the old one, times 100 — and call it rate of change. Same calculation, different presentation, and the readings behave identically.
Its simplicity is worth stating as a virtue. There is nothing hidden in it, no smoothing constant, no convention inherited from the 1970s. Above zero means price is higher than it was N bars ago. That is the whole claim.
The relationship that explains the whole indicator menu
Nearly every oscillator in common use is this calculation with modifications. The relative strength index separates the up moves from the down moves and expresses the ratio on a 0–100 scale. The MACD takes the difference between two smoothings, which is a smoothed rate of change. The stochastic rescales position within a range, which is the same information as distance traveled.
Put them side by side and the turns line up. Each of those tools starts from the same closing prices, so when momentum turns up the relative strength index, the MACD histogram and the stochastic usually turn with it, differing mainly in how much they smooth and how they scale the axis.
Every one of those tools is more complicated than this one and none of them moves independently of it. That is the practical content of the whole “which oscillator should I use” question, and it is answerable with a correlation matrix rather than an argument.
In practice: the two real weaknesses
No fixed range is the first weakness. A momentum reading of 3 means something different on a $40 stock than on a $400 one, and something different again after the instrument has doubled. The bounded oscillators exist mostly to fix this, and that is a genuine improvement rather than a decoration.
Depending on exactly two bars is the second. Everything between them is ignored entirely. A period that rose steadily and one that crashed and recovered give identical readings if the endpoints match.
Which produces a drop-off effect stronger than any moving average has. When the bar from N periods ago is replaced by a different one, the reading can swing sharply on a day price barely moved. A simple moving average spreads that jolt across N bars; here it lands on one.
Volume is absent, as it is from the whole family.
Lengthen the lookback and it converges on a trend measure. 200-period momentum is “is price higher than it was 200 bars ago,” which is the same question a long moving average answers with more smoothing.
A gap produces the largest readings on the indicator, because the endpoint moved a long way with no intervening trading. Maximum momentum, zero transactions.
And it produces no level. Like every oscillator, it cannot tell you where to place a stop; that has to come from structure or volatility.
Each zero cross traded pays a round trip. At $0.03 a share in costs, forty crosses a year is $1.20 a share, and an unsmoothed line crosses zero far more often than a smoothed one.
And there is no momentum in the market to measure. The word is borrowed from physics, where momentum is a conserved quantity. Price has no mass and no inertia; what the indicator reports is a difference between two numbers.
What the momentum indicator is not
It is not a physical quantity. Nothing is conserved and nothing carries forward on its own.
It is not a different measurement from the smoothed oscillators. It is the un-smoothed version of them.
It is not comparable across instruments. Unbounded output in the instrument’s own units.
And it is not lagging in the same way an average is. It has no smoothing at all — it just requires N bars to have elapsed, which is a different kind of delay.
How this connects
A family rather than a single tool. RSI, the MACD histogram, rate of change and the stochastic all measure how fast price has moved.
All of them share one input, so running several is not the confirmation it appears to be - they agree because they are computed from the same closes.
Choosing indicators is the real decision. Two tools from different families - one momentum, one volume or structure - carry more information than three from the same one.
Momentum is not direction. A high reading says price moved fast, and fast moves happen in both directions.
And every one of them is backward-looking, computed from bars that have already printed.
When it fails
In a range it oscillates around zero with no useful structure. Price is higher than it was, then lower, then higher, and each crossing looks like a signal because there is no smoothing to suppress it.
The second failure is the drop-off jolt. A large bar leaving the back of the window moves the line sharply on a quiet day, and traders look for news to explain something that is purely arithmetic.
A third is comparing readings across time. After a large price change, the same percentage move produces a bigger absolute reading, so a “record momentum” observation is often a record price level.
A fourth is treating it as leading. It is a difference between two past closes. Nothing about it arrives before price does.
And a fifth is stacking it with a smoothed oscillator for confirmation. The relative strength index agrees with it for the plain reason that it was built from the same subtraction.
The original data
A ten-period momentum line on the S&P 500 would have sat above zero about 59% of the time. From 1950 to 2026 the index finished higher across 59% of its 19,290 ten-day windows, and each of those windows is exactly one momentum reading: today’s close against the close ten sessions earlier. A positive reading is therefore the normal state of a rising index, not a signal in itself.
The most useful thing you can do with this page is an experiment that takes five minutes. Put plain momentum on a chart beneath whichever oscillator you normally use, and look at the two shapes. If the turns line up, the more complicated tool is this one with smoothing and a rescaled axis — which is worth knowing before spending any more time choosing between oscillators, and which the shared arithmetic says is what you should expect to find.
Related
RSI is this calculation split into up and down moves and bounded 0–100. MACD histogram is a smoothed version of the same idea. And choosing indicators carries the measured question of how much of the menu is one calculation.
I plot plain momentum next to whatever oscillator I am considering before I add another one. The shapes tend to be the same, because most of them are this calculation with different amounts of smoothing and a different scale on the axis. Knowing that keeps a chart from showing the same information three times.
— Michael Whitman
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