The momentum indicator is an important and popular indicator. It provides information about the rise and fall of stock prices and measures the speed and strength of the trend. This helps investors predict market fluctuations and form effective trading strategies. Discover now how to use Momentum through the article below from Forex Trading to turn data into a smart investment strategy.
Learn about the characteristics of Momentum to know how to use Momentum
The Momentum indicator uses a blue oscillating line along with a reference line with a value of 0 to evaluate the strength of the trend. The reference line at 0 shows us the area where the price shows no particular trend or is likely to move sideways.
The Momentum line always fluctuates around the reference line. The distance between these two lines are important indicator. When the Momentum line is far away from the reference line, it means that strong fluctuations in price are about to occur. This gap shows how fast the price is moving, with a large gap indicating the market is moving fast and vice versa.
Therefore, it is important to keep track of the Momentum line and the distance from the Momentum to the reference line. It can help us evaluate the strength and speed of market trends at the present time.
You may not know the formula for calculating Momentum
Before learning how to use Momentum, you need to know the calculation formula. Normally, the Momentum indicator is calculated based on the closing prices of previous trading sessions. Here are two basic ways to calculate Momentum:
Method 1: Momentum = Current closing price – The closing price of the previous period
This formula can be understood as the difference between the current closing price and the closing price of the previous trading session. Note: The previous trading period can be any period of time, for example: 10 days, 20 days…
Method 2: Momentum = (Current closing price / Previous period’s closing price) * 100%
This calculates the percentage change in the closing price between the current trading session and the previous trading session. It is also a way to evaluate the volatility of the closing price in the current session compared to the previous session, helping you quantify the speed and trend of the market.
See more: Everything you should know about Forex momentum!
What is the meaning of the Momentum indicator?
If you want to learn how to use Momentum effectively, you need to know what this indicator means. When you know what it means for the investment process, you will use it more easily. In general, the Momentum indicator has two main meanings as follows:
Evaluate the strength of the trend at a certain time
The Momentum indicator plays an important role in assessing the strength of the trend. By comparing the position of the Momentum line with the reference line, you can evaluate the strength of the current trend while also predicting the possibility of the trend moving sideways.
When the Momentum line crosses the 0 reference line, it shows that the price of the current trading session is higher than the previous session. The market at this stage often tends to increase in price and buyers dominate. At the same time, the larger the gap between the Momentum line and the reference line, the stronger the motivation to continue increasing prices will be.
On the contrary, the Momentum line is below reference line 0, showing that the price is trending down, and the price level of the current trading session is lower than the previous session. If the Momentum line is deep below and away from the reference line, the downtrend is usually stronger. However, it usually only happens when the market is going through a period of strong price decline. The distance between the Momentum line and the reference line is also an additional indication of the strength of the downtrend.
Divergence signal with price line
Combining the Momentum indicator and divergence with the price line is an important signal, it helps you identify potential reversal points. Momentum divergence appears when the price trend is in one direction, while the indicator’s oscillation line shows the opposite direction. This makes it easy for you to spot price reversals.
Divergence in technical analysis is considered one of the reliable signals of trend reversal. There are two main cases of divergence as shown below.
Positive divergence
The price chart makes successive lower lows. That shows a bearish trend, while the momentum indicator shows a bullish level.
Negative divergence
The price chart makes successively higher highs. It shows an uptrend, but the momentum indicator shows a downtrend.
Generally these two positive and negative divergences give you signals about a change in price trend. You can rely on it and use it as a foundation for future trading decisions.
How to install Momentum indicator on platforms
The Momentum indicator is available on the MT4 and Tradingview platforms. So you can completely install and use it if you want. Below are instructions for installing Momentum on both platforms.
Install the Momentum indicator directly on MT4
Installing the Momentum indicator on MT4 is similar to installing other indicators. Below are the detailed steps:
- On MT4, navigate to the Navigator section.
- In the list, find and tap “Indicators”.
- Next, select “Oscillators”.
- In the list of oscillators, find and select “Momentum”.
- After selecting, a settings window will open, you can customize the settings for cycle, color, width…
- Click “OK” to complete the Momentum installation on MT4.
Install Momentum on the Tradingview platform
Yes, to install the Momentum indicator on TradingView, you can follow these steps:
- Visit TradingView and select the chart you want to analyze technically.
- Click the “Indicator” icon in the upper right corner of the screen and enter “Mom” in the search box. The Momentum indicator will appear first.
- After selecting the Momentum indicator, click the “Settings” icon to adjust settings such as period, timeframe, color and thickness of the indicator.
- Click “OK” to complete the settings and apply the Momentum indicator to your chart.
With these simple steps, you can install the Momentum indicator on TradingView. And use it to analyze trends and trading signals in the market.
How to use Momentum in in each specific case
The Momentum indicator is a useful tool that helps traders evaluate the strength of each trend. Here’s how to use Momentum in the two most common cases.
How to use Momentum to trade the Momentum line crossing the 100 line
When the Momentum indicator crosses the 100 line from the bottom up. It signifies that BUY traders are dominating the market. This represents a potential increase in price to take place and is a signal to open a BUY order following the trend.
On the contrary, if Momentum crosses the 100 line from above, it means that it indicates the dominance of SELL traders and may continue to decline. In this case, you can use this signal to open a SELL order following the market trend.
However, it should be noted that the signal from the Momentum indicator crossing the 100 line can be quite weak. Therefore, it should be combined with other technical indicators to increase accuracy. To use this signal effectively, you should apply it in the context of a specific general trend. At the same time, you need to find a reasonable cutoff point to open the best order. This helps minimize fake signals and increases the likelihood of trading success.
See more: Exness – Trade With The World’s Leading Broker Exness
How to use Momentum to recognize convergence divergence signals between the price line and the Momentum indicator
Divergence in the Momentum indicator is the same as divergence based on price. Based on the peaks and valleys formed by both the price line and the Momentum line.
Convergence will occur if the price creates a lower bottom than the previous bottom. But at the same time, Momentum creates a higher bottom than the previous bottom.
Divergence will occur if the price creates a higher peak than the previous peak. But at the same time, Momentum creates a lower peak than the previous peak.
However, these signals can be weak when appearing in a strong trend, and are often noisy. Therefore, you should not abuse reversal signals from Momentum. It needs to be combined with other technical analysis tools such as candlestick reversal patterns at important support and resistance zone . This combination at support and resistance lines can increase the accuracy and reliability of trading signals.
Epilogue
Above Forex Trading has shared very carefully the characteristics, meaning, and formula for calculating Momentum. At the same time, we also guide you how to use Momentum effectively. Hope the article is useful and gives you practical, easy-to-apply knowledge.
Frequently asked questions
What is Momentum? How does it work?
The Momentum indicator is a commonly used tool in technical analysis. Used to measure the speed and strength of price trends over a certain period of time. It helps you understand the forces that are driving the market. It also helps you easily know whether the current trend will continue or reverse.
How to use Momentum to determine market trends?
To use the Momentum indicator for the purpose of determining market trends. You can do this through:
- Follow the Momentum line.
- Compare with price.
- Consider time frames.
- Combine with other indicators.
How to identify buy and sell signals from the Momentum indicator?
You can use the Momentum indicator to identify buy and sell signals. Can be through: Crossover with reference line, using threshold cutoff level, determining divergences, Using histogram…
