# Momentum

Momentum is the tendency of a stock’s recent price direction to persist for a period, often measured by its return over a specified lookback window.

## What it means

A stock has positive price momentum when its price has risen over a chosen period and negative price momentum when it has fallen. The lookback period matters: a stock can show positive momentum over six months but negative momentum over one month. Momentum describes past price movement; it does not establish why the price moved or whether the direction will continue.

In technical analysis, *momentum* can refer to the direction and size of a past price change or to a specific indicator, such as rate of change. Different indicators may use different prices, lookback windows and scales. A momentum reading is therefore meaningful only alongside its calculation method and dates.

## How it is calculated

One common measure is the percentage price change over a lookback window:

`Price momentum (%) = [(P_now / P_then) − 1] × 100`

- `P_now` is the stock price at the end of the window, in US$ per share.
- `P_then` is the stock price at the start of the window, in US$ per share; it must be greater than zero.
- The result is a percentage, not a dollar amount. Zero means the two prices are equal.

Use comparable prices at both ends: for example, closing prices adjusted consistently for stock splits. If the aim is to measure *total return* momentum, dividends also need to be accounted for; a price-only calculation excludes them. State the window explicitly, such as 20 trading days or six calendar months, because the readings are not interchangeable.

## Worked example

Suppose, hypothetically, a stock’s split-adjusted closing price was US$100 per share 20 trading days ago and is US$110 per share now.

1. Divide the current price by the earlier price: `US$110 ÷ US$100 = 1.10`.
2. Subtract one: `1.10 − 1 = 0.10`.
3. Convert to a percentage: `0.10 × 100 = 10%`.

The stock’s 20-trading-day price momentum is **+10%** under this measure. If the current price were US$90 instead, the result would be `(US$90 ÷ US$100 − 1) × 100 = −10%`. Neither reading says what the next 20 trading days will bring.

## Why it matters before you trade

Momentum provides context for a proposed trade: it shows whether the stock has recently moved in the same direction as the proposed position. It can also prompt a closer look at recent news or events behind a sharp move. But a strong reading can coincide with high volatility, a wide bid-ask spread or limited liquidity. Those features affect the risk and potential execution cost of an order regardless of the past return.

A pre-trade check can consider order size, participation in daily volume, estimated spread and market impact alongside recent price movement. For a basket, it can also identify concentrated exposures. These checks address questions a momentum percentage alone cannot answer, such as how readily an order might be executed.

## How PreTrAIde uses it

PreTrAIde’s stated quantitative layer does **not** list a momentum indicator or momentum-based verdict rule. Its pre-trade analysis instead evaluates a user-built stock basket before any order is placed, using measures that include estimated spread, participation in daily volume, market impact, daily volatility, liquidity and concentration. Its AI layer reasons using the quantitative scores, news and analyst ratings.

PreTrAIde returns GO, NO-GO or MODIFY decision-support verdicts for the basket and each line, with a model-estimated success probability, risk assessment, suggested execution strategy and plain-language reasoning. These are not investment recommendations or forecasts of returns. A momentum reading can be considered separately as historical context; it should not be presented as a documented PreTrAIde score.

## Common mistakes

- **Treating a positive reading as a prediction.** The formula reports a past return, not a future one.
- **Omitting the window.** A 20-day change cannot be compared meaningfully with a six-month change without noting the periods.
- **Mixing price conventions.** Unadjusted prices around a stock split can produce a misleading change; price-only and total-return measures also differ when dividends occur.
- **Ignoring execution conditions.** Momentum says nothing by itself about spread, liquidity or market impact.
- **Confusing momentum with volatility.** Momentum measures directional price change over a window; volatility measures the variability of returns.

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Source: https://pretraide.com/glossary/momentum