Quite often technical traders wonder that when moving averages give all the necessary signals, why we require momentum indicators. Remember moving averages are essentially about direction and helps you to decide whether to trade on the long side or the short side. Moving averages and most other technical indicators are primarily focused on determining likely market direction, up or down. Moving averages do not tell you much about whether the uptrend or downtrend is strong, weak or neutral. This is important because your commitment to the trade and your ability to commit capital will depend on the strength of the indicator. That is where momentum indicators come in very handy.

When it comes to momentum indicators there is an important point to remember. Unlike moving averages, these momentum indicators are not about the direction of the market but about the strength and conviction of the direction. Its main purpose is not so much to determine market direction as to determine market strength. These indicators include such popular tools as the Stochastic Oscillator, the Relative Strength Index (RSI), the Moving Average Convergence-Divergence (MACD) indicator, and the Average Directional Movement Index (ADX).

By measuring the strength of price movement, momentum indicators help investors determine whether current price movement more likely represents relatively insignificant, range-bound trading or an actual, significant trend. Because momentum indicators measure trend strength, they can serve as an important early warning signal that a trend is coming to an end. For example, if a security has been trading in a strong, sustained uptrend for several months, but then one or more momentum indicators signals the trend steadily losing strength, it may be time to think about taking profits. For example if the index is going higher but the breadth of the market or the A/D ratio is reducing consistently, then it is a clear sign that strength is lacking in the movement.