Momentum Indicator

 

MOMENTUM indicator review

Momentum indicator is one of the simplest, obvious and popular tools or the technical analysis while Forex trading (fig. 1). Momentum represents just one curve on the price chart that shows the speed of price change, which allows you to use it to determine the direction of the trend. Simultaneously Forex indicator slightly smoothes the volatility parameters.

Momentum indicator for Forex trading

Since MOMENTUM does not imply averaging, this indicator shows the dynamics synchronous with the price and can be leading, but not always. This tool is considered more effective on long timeframes. MOMENTUM is displayed in a separate window below the chart, that is it looks like a Forex oscillator. It is measured by levels from 0 and 100, practically, it is the percentage that shows the ratio of the current price to the previous one. The standard period for calculation is 14. If the period is more than 20, then the indicator can be used as a trend mark.

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Momentum indicator in MetaTrader 5 platform

Momentum indicator is available in all main Forex terminals (full truth about Forex). It is optimal to set it with the middle line in order to determine the signals more precisely. In MT5 trading terminal MOMENTUM is available in oscillator section. The preset parameters allow the tool to work as oscillators. For many strategies, the period parameter of the tool changes. MOMENTUM is located at the bottom of the main chart as a blue line. In order to make its parameters more reliable, a sliding line is set (fig. 2):

Momentum indicator in MetaTrader 5 platform

 

MOMENTUM signals

Momentum shows an ascending trend if the price ratio is above 100 and continues to grow. Respectively, if the ratio is below 100 and decreases, the trend is descending. If the indicator extremes are updated, the trend is strong and maybe the price change accelerates. The advantage of the indicator is that the trendline can be broken through earlier than on the chart, which makes MOMENTUM the leading indicator.

When analyzing the market with the help of this tool, much attention is paid to extremes. Extremely high, as well as extremely low indicator values confirm the continuation of the trend. If MOMENTUM has reached the highest extremum and is directed downwards, the prices will most likely continue to grow. In any case, if M shows a sharp jump, it is a signal for a reversal. An important feature of the indicator is the difference between its values and the price, divergences. If the minimums or maximums of the price chart differ from the indicator values, it may indicate the upcoming trend reversal. However, in this case, there is a high probability that MOMENTUM may show a lot of false signals of Forex trading.

If the indicator has a set period of 5 to 14, it shows whether the price is higher or lower than the previous one and it functions as an oscillator. If the period is more than 20, then MOMENTUM can display the change of extremes or their absence and thus shows the direction of the trend. It is necessary to select the indicator period taking into account the timeframe, for longer trading a longer period is used, but it is necessary to take into account the requirements of the strategy, because a wrongly selected period can lead to a delay of the indicator signals.

MOMENTUM is mainly used according to the trend, which is more effective when the market is highly volatile. But with additional tools and sufficient experience, MOMENTUM can also be used against the trend. In this case, the oversold and overbought zones, which are marked on the chart with lines parallel to the level of 100, are determined in advance. When the indicator leaves the overbought zone, it is a signal to sell, when from oversold it is a signal to buy. But this is quite a risky technique, so it’s used with supplementary indicators only.

 

Trading strategies based on MOMENTUM indicator

The combination of MOMENTUM and moving average is a principle for many trading strategies on the majority of timeframes. The MA period corresponding to the indicator periods is determined. The Sell signal is the crossing of the moving price from top to bottom, if the indicator also crosses the zero level from top to bottom. The signal to buy is the crossing of M and MA from the bottom upwards.

Tomas Demark also developed a strategy with MOMENTUM. It’s quite simple, carried out on the hourly chart, working with it requires ЕМА 9 and ЕМА 30, building a trendline on the parameters Commen and TD. Buy signal is crossing 9 EMA upwards and MOMENTUM indicator above 100, the price shall break the trend line upwards. Sell signal is crossing of 9 EMA and 30 EMA downwards by MOMENTUM indicator below 100. This Forex strategy implies the required use of stop-losses.

MOMENTUM can also be used with one exponential sliding line. For example, M is set for the period 18, EMA is set for the period 19. MOMENTUM shall cross the level of 100 from the bottom upwards, the price crosses EMA, – it is considered as a signal to buy. On the contrary, if M crosses the 100 mark from the top to the bottom, as well as the price moving, a sell transaction is opened.

MOMENTUM is used in Elder’s strategy, such as «Elder’s triple screen», where the MOMENTUM indicator is used together with Alligator and Stochastic oscillator (fig. 3). The data of two timeframes are used for trading: the senior timeframe H4, which shows the direction of the trend, the lower timeframe H1 shows the entry points with confirmation of data by Stochastic – overbought, oversold, momentum direction. Alligator signals about the beginning of the new trend, Stochastic shows the momentum strength on the inferior timeframe, MOMENTUM shows the entry point:

Trading strategies based on MOMENTUM indicator

MOMENTUM is used in Traders Dynamic Index and Rainbow strategies by multicolored moving averages. The buy signal includes the determination of an uptrend in the moving average, the price should be closer to one of the moving averages, preferably to the moving average with the longest period, MOMENTUM shall be directed upwards. In the opposite case, there is a sell signal. Of the three moving ones, the slowest is the level of support and resistance, it should be used as a guide when closing the deal. MOMENTUM confirms the deal, if there is a difference between its indicators and the price.

The MOMENTUM indicator is used in the strategy of trading on the impulse – an asset that demonstrates a strong movement. The strategy is based on a simple buy on the ascending trend, sell – on the descending trend. MOMENTUM is used in this strategy in combination with MACD and RSI indicators.

Another popular strategy that uses MOMENTUM is «20 points a day» on the candlestick chart. It is believed that it brings stable results when trading Forex. The strategy is implemented in a period of time, in which no news are expected to be released that can affect the rate of the asset. Most likely, it is better to work with it some time after the release of important news. It is supposed to work with rather volatile pairs on M30 timeframe. In addition to the MOMENTUM indicator, it is necessary to set a simple MA (SMA) with the period 20. The signal to buy is, if MOMENTUM is above the middle line, if the candlestick has closed above the moving. The signal to sell is, if the candlestick has closed below the moving, MOMENTUM is below the middle line. It is necessary to set stop-losses and monitor the news background and price behavior. If you see even a very weak movement against the trend, the deal should be closed.

MOMENTUM works better on the volatile market, but there are strategies in which it works effectively on the flat, for example «MOMENTUM+RSI» strategy, where the optimal time is a minute timeframe. MOMENTUM is set for the period 7, RSI for the period 5, levels for the periods between 25 and 75. The support and resistance lines also need to be set. Level 50 is marked on the RSI indicator, MOMENTUM approximately defines the limits of volatility, within which it is proposed to trade. Buy deals are opened when the price starts from the support line, simultaneously MOMENTUM is directed upwards, like RSI. And vice versa, a sell trade opens when the price starts from the resistance line, MOMENTUM is directed downwards, like RSI.

Despite the fact that MOMENTUM is considered more suitable for scalping strategies, it is rarely used in scalping. For example, in combination with RSI, moving average, simple and exponential strategies with the following parameters: exponential MA (EMA) with the period 7, simple moving (SMA) with the period 21, the period of MOMENTUM – 21, RSI period 14. The signal to the market entry is the crossing of movings. Buy positions are opened at the intersection of EMA and a simple moving bottom-up with MOMENTUM indicator above 100 and RSI pointing up. Sell deals are opened when the exponential moving crosses SMA from top to bottom, MOMENTUM shows the level less than 100 and RSI pointing down.

The next strategy is quite common with ADX (Average Directional Index) and Momentum. The trend ADX indicator is in the list of standard tools on trading platforms. The strategy is applied on the five-minute chart, most frequently with the pair EUR/USD. The MOMENTUM indicator is set up for the period 14, ADX on 14 and level 25. In this strategy ADX works as the trend one and MOMENTUM as oscillator, respectively, AD shows the direction and MOMENTUM – the entry points. According to the strategy it is necessary to wait, when ADX will be above 25 and MOMENTUM above 100 – it is a signal to buy, if MOMENTUM is below 100, it is a signal to sell.

 

Summary

The MOMENTUM indicator is one of the easiest to learn and apply, it shows quite accurate signals, in some cases it can work as a leading indicator of the change in price dynamics. With different settings of the periods the indicator can be used as an oscillator, determining the entry points like the trend indicator and showing the direction and strength of the trend.

MOMENTUM is used in many strategies and shows good results. But it has drawbacks: it can show inaccurate signals when a trend changes abruptly, especially on the short timeframe the indicator can react too quickly and incorrectly to a situation change. Therefore, MOMENTUM is used as an auxiliary tool. However, there are strategies in which it is used as the main indicator, trading is possible and using this indicator only.


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