When the stock trader uses momentum, he is plotting price differences for a set period of time to measure the rate of ascent or descent. Let's say we are looking at a zero line. The prices are rising and the momentum line is above the zero line and rising. This is a clear statement that the uptrend is accelerating. Should the upslanting momentum line begin to flatten out, our trader knows that the new gains of the latest closing are the same as the gains of 10 days earlier. The prices may still be advancing, but the rate of ascent (velocity) has leveled off. When the momentum line begins to drop downward toward the zero line, the uptrend in price is still going, but at a decelerating rate, and the trend is losing momentum.

If the momentum line moves below the zero line, this means the latest 10-day close is now under the close of 10 days ago and a near-term downtrend is in effect. Also, the 10-day moving average will have started to decline. The lower the momentum lines goes, the more momentum (velocity) the downtrend gains. The downtrend's momentum does not begin to decelerate until the momentum line begins to advance upward again.

Remember, momentum measures the differences between prices at two time intervals, so for the line to advance, the price gains of the latest close must be greater that the price gains of 10 days ago. A flat momentum line is created when prices by close by the same amount as 10 days ago. The momentum line declines when the last price gain is less than that of 10 days ago, even though the prices may still be rising. This is how momentum measures acceleration and deceleration in a price trend.

The way the momentum line is constructed causes it to always be one step ahead of the price movement. The line leads the advance or decline in prices, and levels off while the current price is still in effect. As prices begin to level off, the momentum line begins to move in the opposite direction.

Andy Swan is co-founder and head trader for DaytradeTeam.com.  To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.