The data item is defined as the percentage difference between close price of the stock and the simple moving average of close price of previous 250 trading days. Suppose current stock price is Rs.30 and previous 250 trading day average price is Rs.22.7, the data item is calculated as (30.0/22.7) – 1 = 32.2%. This is one of the most basic types of technical indicator and helps understand the momentum of the stock. Price momentum is the rate of change in price of a particular stock.
Momentum investing is a strategy that tries to understand the existing trend in the market and attempts to capitalize on the same. So if a momentum investor feels that the bull run in the market will continue he/she will buy stocks whose prices are increasing in order to benefit from the trend. If he/she feels that the market is about to enter bear phase, then it makes sense to sell stocks that have been falling in order limit losses.
Once the momentum investor identifies the trend he/she can use the percentage price above 12M SMA to shortlist stocks that have either been trending higher or dropping down. If the investor is analyzing short term trend then it makes sense to use 1M SMA and when he/she is analyzing long term trends, it’s better to use 12M SMA.