Momentum indicators: RSI, stochastics, rate of change
Momentum measures how fast price is moving, not where it is going. The word “overbought” has caused more losses than any other term in technical analysis.
Momentum indicators measure the speed and size of recent price changes rather than direction. They answer “how hard has this been moving?” — not “which way next?”
Rate of change
The simplest of them. Percentage change over a lookback:
Unbounded, centred on zero. Positive means higher than n bars ago. That is all it
claims, and it is honest about it.
RSI
The Relative Strength Index compares the average size of up closes to the average size of down closes over a lookback, then maps the ratio onto a 0–100 scale.
A reading of 70 does not mean the instrument is expensive. It means gains have outweighed losses at a particular ratio over the last fourteen bars. Those are not the same statement, and the gap between them is where the damage happens.
Stochastics
Stochastics asks where the close sits inside the recent high–low range:
A reading of 95 means the close landed near the top of the recent range. In a strong trend, closes land near the top of the range repeatedly, for weeks.
On “overbought” and “oversold.” These terms describe the indicator, not the market. An oscillator at an extreme is telling you a move has been one-sided. Strong trends produce sustained extreme readings by construction — that is what a strong trend is. Reading an extreme as a reason to fade the move means fighting the exact condition the indicator was built to detect.
Divergence
Divergence is price making a new extreme while the oscillator does not. The common reading is that the move is losing force.
Sometimes that turns out to be so. Frequently it is not, and divergence can persist through an entire trend, printing repeatedly while price continues. Divergence is worth noticing and is weak on its own. Anyone presenting it as reliable is overstating it.
What momentum is genuinely useful for
Comparing the character of the current move to recent ones on the same instrument. If today's push is happening at a rate the instrument has rarely reached in six months, that is a factual observation about unusual conditions. What it implies is your call, and the indicator has no opinion.