Momentum Indicator (Momentum)

Published:14 May 2019 Updated:4 January 2024

Description of the Momentum indicator

Momentum indicator (Momentum) is one of the simplest, most obvious and popular tools of technical analysis during forex trading (Fig. 1). It represents just one curve on the price chart, which shows the speed of price change, which allows you to use it to determine the direction of the trend. In this case forex indicator smoothes out the volatility indicators a bit.

Momentum indicator for forex trading

Since Momentum does not imply averaging, this indicator shows synchronous dynamics with the price and can be leading, but not always. The tool is considered more effective on long timeframes.

Momentum is displayed in a separate window under the graph, that is, it looks like forex oscillator. It is measured in levels from 0 and 100, practically, it is a percentage that shows the ratio of the current price to the previous price. The standard period for calculation is 14. If the period is more than 20, the indicator can be used as a trend indicator.

Log in to your broker’s terminal, add the Momentum indicator to the chart and see what comes out

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Momentum indicator in the MetaTrader 5 platform

Momentum indicator is on all major forex terminals (The whole truth about forex). It is optimal to install it with the average line to determine the signals more accurately. In the MT5 trading terminal Momentum is located in the oscillators section (Fig. 2):

Momentum indicator in the MetaTrader 5 platform

The preset parameters allow the tool to work as oscillators. For many strategies, the instrument’s period parameter changes (Fig. 3):

Momentum indicator: settings for forex trading

Momentum in the form of a blue line is located at the bottom of the main graph. In order to make its indicators more reliable, a sliding line is set (Fig. 4):

Momentum with slides is used to find reliable signals

Momentum signals

Momentum shows an uptrend if the price ratio is above 100 and continues to rise. Correspondingly, if the ratio is less than 100 and decreasing, the trend is downward. If at the same time the extremums of the indicator are updated, the trend is strong and, probably, the price change is accelerating. The advantage of the indicator is that the trend line can be broken earlier than on the chart, which makes Momentum a leading indicator.

When analyzing the market with the tool, much attention is paid to the extremums. Extremely high as well as extremely low values of the indicator confirm the continuation of the trend. If Momentum has reached the highest extremum and is directed downward, then prices are likely to continue to rise. In any case, if the indicator shows a sharp spike, this is a signal for a reversal (forex analytics).

An important feature of the indicator is the divergence of its values with the price, the divergence. If the minimums or maximums of the price chart diverge from the indicator, it may indicate an impending trend reversal. However, in this case there is a high probability that Momentum can show a lot of false forex signals trading.

If the period of the indicator is set between 5 and 14, it shows whether the price is higher or lower relative to the previous one, it functions as an oscillator. If the period is more than 20, Momentum can display the change of extremums or their absence, and thus shows the direction of the trend. It is necessary to select the period of the indicator, taking into account the timeframe, a longer period is used for a longer trade, but it is necessary to consider the requirements of the strategy, because the wrong period can lead to a lag of the indicator signals.

Momentum is used mainly along the trend, which is more effective when the market has high volatility. But with additional tools and with enough experience Momentum can be used against the trend. In this case, the oversold and overbought zones are preliminary determined and marked on the chart with lines parallel to the 100 level. When the indicator leaves the overbought zone, it is a signal to sell, when it leaves the oversold zone, it is a signal to buy. But this is quite a risky technique, so it is used only with additional indicators.

Trading strategies based on the Momentum indicator

The combination of Momentum and the moving average is the basis for many trading strategies on most timeframes. A MA period corresponding to the periods of the indicator is set. The signal to sell is a 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 the indicator and MA from the bottom up.

Thomas Demark also developed a strategy with Momentum. It is quite simple, it is carried out on the hourly chart, to work with it you need EMA 9 and EMA 30, building a trend line by Commen and TD parameters. Signal to buy – crossing of 9 EMA and 30 EMA upwards and Momentum index is higher than 100, the price should break the trend line up. Signal to sell – crossing of 9 EMA and 30 EMA downwards with the Momentum value below 100. This forex strategy implies the obligatory use of stop-losses.

Momentum can also be applied to a single exponential moving average. For example, the indicator is set up on period 18, EMA – on period 19. Momentum should cross the 100 level from bottom to top, the price crosses the EMA – this is considered as a signal to buy. On the contrary, if Momentum crosses the level of 100 from above downwards, as well as the price of the moving average, then a sell trade is opened.

Momentum is used in Elder strategies. In particular, in one such as Elder’s Three Screens, in which the Momentum indicator is used together with the Alligator and oscillator Stochastic (Fig. 5). Two timeframes data are used for trading: the senior timeframe H4, which shows the direction of the trend, the junior timeframe H1 shows entry points with confirmation of the data by Stochastic – overbought, oversold, the direction of the impulse. Alligator signals the creation of a new trend, Stochastic shows the strength of the momentum on the lower timeframe, Momentum shows the entry point:

The Elder's Three Screens Forex Strategy: Momentum with Alligator and Stochastic

Momentum is used in a strategy with Traders Dynamic Index and Rainbow, multi-color moving averages. The signal to buy involves the determination of an uptrend by a moving average fan, the price should be closer to one of the moving averages, preferably the moving average with the longest period, Momentum should be directed upwards. If the conditions are reversed, a sell signal appears. Of the three moving averages, the slowest one represents the support and resistance level and should be used as a reference when closing a trade. Momentum confirms the transaction, if there is a divergence of its indicators and the price.

The Momentum indicator is used in a momentum trading strategy – an asset that exhibits strong movement. The strategy is based on a simple buy on an uptrend and sell on a downtrend. In this strategy, Momentum is used together with the indicators MACD and RSI.

Another popular strategy that uses the Momentum indicator is “20 pips a day” on candlestick chart. It is believed that it brings stable results in forex trading. The strategy is implemented during the period of time when no news is expected to affect the asset rate. Most likely, it is better to work with it some time after the release of important news.

It is assumed to work with sufficiently volatile pairs on the M30 time frame. It is necessary, in addition to the Momentum indicator, set a simple MA (SMA) with a period of 20 (Fig. 6). Signal to buy – Momentum is above the average line, if the candle closed above the moving line. Signal to sell – the candle closes below the moving line, Momentum – below the average line. It is necessary to put stop-losses and monitor the news background and price behavior. If even a very weak movement against the trend is seen, the trade should be closed.

With moving averages Momentum is used in a number of forex trading strategies

Momentum works better in a volatile market, but there are strategies in which it works effectively in a flat, such as the strategy “Momentum+RSI”, where the optimal time is considered a minute timeframe. Momentum is set for a period of 7, RSI for a period – 5, levels – between 25 and 75. It is also necessary to set the support and resistance lines.

The RSI indicator marks the 50 level, Momentum roughly defines the volatility boundaries within which it is suggested to trade. Buy trades open when price pushes back from the support line, with Momentum pointing up as the RSI. Conversely, a sell trade opens when price pushes away from the resistance line, with Momentum pointing downward, like the RSI.

Although 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 with the following parameters: exponential EMA with a period of 7, simple moving average with a period of 21 (SMA), Momentum period – 21, RSI period – 14. Signal for entering the market – crossing of moving lines. Positions to buy are opened when the EMA of a simple moving instrument crosses from bottom to top, with Momentum index over 100 and RSI, directed upward. On the sale trades are opened, when the exponential moving average crosses downward the SMA, the Momentum level is less than 100, and the RSI is directed downward.

The following is a fairly common strategy with ADX (Average Directional Index) and Momentum. The ADX trend indicator is included in the list of standard tools on trading platforms. The strategy is carried out on a five-minute chart, most often with the EUR/USD pair. The Momentum indicator is set to a period of 14, ADX is set to 14 and the level of 25. In this strategy, ADX acts as a trend and Momentum acts as an oscillator, respectively, ADX shows the direction and Momentum shows the entry points. The strategy is to wait for the ADX to be above 25 and Momentum to be above 100, this is a buy signal, if Momentum is below 100 this is a sell signal.

Conclusions

Momentum indicator – one of the easiest to learn and use, it shows fairly accurate signals, in some cases, it can work as a leading indicator of price dynamics. With different period settings, the indicator can be used as an oscillator, determining entry points, and as a trend indicator, showing the direction and strength of the trend.

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

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