What is Momentum Indicator that is currently popular with many traders? Because it reflects the trend and evaluates the rate of change in price over a certain period of time. So what exactly is Momentum? Please join Forex Trading in following the article below to learn details about this index!
What is the concept of Momentum indicator?
Momentum Indicator is a popular tool in Forex technical analysis, used to measure the rate of change in price. It represents the degree of price increase or decrease through the rate of price fluctuation. This indicator also compares past price movements with current ones. This is intended to measure the rate of price change over a specific period of time. This helps investors determine the strength of the current trend.
This indicator helps identify fluctuations in market sentiment. When the indicator reaches extreme zones such as overbought or oversold, it can provide a warning signal of a possible market reversal. Additionally, Momentum is useful for detecting manifestations of divergence.
Characteristics of Momentum indicator
Momentum indicator consists of a blue oscillating line and a reference line with value 0. Based on the value of Momentum and the distance to the reference line, we can evaluate the strength of the trend.
- A reference line with a value of 0 is an area where the stock or index price has no clear trend or is likely to move sideways.
- The Momentum line always fluctuates around the reference line. The farther this line is from the reference line, the stronger the price fluctuations will be.
- The distance between the Momentum line and the reference line indicates how quickly or slowly the price is moving. The farther the distance, the faster the market moves. On the contrary, small gaps indicate that the market is moving slowly.
See more: Everything you should know about Forex momentum!
Momentum calculation formula
Momentum indicator is relatively easy to calculate, based on the closing prices of trading sessions.
The formula for calculating Momentum can be seen as follows:
Method 1: Momentum Line = Price Close (i) – Price Close (in)
Cách 2: Momentum = (Close i / Close (i-n)) * 100
In there:
- Price Close i is the closing price of the ith trading session.
- Price Close (in) is the expected closing price of the printed trading session. Where n is the number of previous trading sessions.
Meaning of Momentum indicator
To be able to use the Momentum indicator effectively , investors need to clearly understand the information and meaning it brings in the investment process.
It can evaluate the strength of the trend
Momentum Indicator is an important tool to evaluate trend strength. By looking at the position of the Momentum line compared to the reference line, investors can determine the strength or weakness of the current trend. Thanks to that, we can predict the possibility of the market moving sideways.
When the Momentum line crosses the 0 reference line, this shows that the current price is higher than the previous session, signaling an uptrend. If the distance between the Momentum line. And if the reference line is large, the price increase momentum is stronger. On the contrary, when the Momentum line is close to the reference line, the price momentum will be weak.
When the Momentum line is below the reference line 0, the price tends to decrease. If the Momentum line is deep and far away from the reference line, the downtrend is often very strong. This shows that the market is in a strong bearish phase and a large gap is a sign of downtrend strength.
Divergence signal with price line
In technical analysis, divergence is considered a reliable signal of a possible trend reversal. There are two main types of divergence:
- Positive divergence: Occurs when the price chart makes consecutive lower lows, indicating a downtrend. However, the momentum indicator shows an increase. For example: The price of asset ABC is falling, but the bottom of the Momentum indicator is rising. This shows that when there are signs of price decline, selling motivation slows down. Signaling a possible reversal and investors can consider opening new buying positions.
- Negative divergence: Occurs when the price chart makes consecutive higher highs, indicating an uptrend. However, the momentum indicator shows a downtrend. For example: The price of asset ABC is increasing, but the peak of the Momentum indicator is decreasing. This shows that when there are signs of price increases, buying motivation slows down. Signaling a possible reversal and investors can consider opening a sell position.
Ways to use Momentum in Forex
To interpret Momentum indicator, traders need to pay attention to the 100 axis.
- When Momentum moves above the 100 axes, this shows that the price trend is increasing.
- When Momentum moves below the 100 axes, this shows that the price trend is down.
In addition, the Momentum indicator also helps traders determine the strength of the trend. The further the indicator is from the 100 axis, the stronger the upward or downward price trend. On the contrary, if the indicator is close to the 100 axis, the strength of the trend will be weaker.
You should also know how to identify support and resistance to better understand the market. Round prices can be used, such as 0.5 USD/share or 1 USD/share. Are resistance and support in Forex, as these price levels are often considered important psychological points. Investors often feel the stock value is fair at these round prices.
In addition, we can also use the Fibonacci number sequence to determine support and resistance levels. The Fibonacci sequence scaled score zones can be considered support when the price crosses them and become resistance when the price falls below them.
How to trade with a Momentum indicator
When using momentum oscillators, it is recommended to combine them with other technical indicators such as Moving Average Convergence Divergence (MACD), Bollinger Bands (BB), Relative Strength Index (RSI), and RSI stochastic (StochRSI). All these indicators help determine the speed or extent of Forex price changes.
Trade when Momentum crosses the 100 line
Prices on the current trading market are constantly fluctuating. Most of the trading time, the Momentum index is above or below the 100 line.
- When the line Momentum indicator goes up and crosses the 100 line. It is a sign that the buyers are dominant and the market trend is likely to continue up. This is a good signal for traders to place Buy orders.
- On the contrary, when the Momentum line goes down and crosses the 100 line, this shows that the sellers are taking advantage and the price is likely to continue to decrease. In this case, the trader should choose to place a Sell order.
Trade when Momentum diverges or converges
To recognize divergence or convergence, we need to observe the peaks and troughs formed by the Momentum line and the price line.
- Divergence: Occurs when the Momentum line creates a subsequent peak that is lower than the previous peak. Meanwhile, the price line creates a subsequent peak that is higher than the previous peak.
- Convergence: Occurs when the Momentum line creates a subsequent bottom that is higher than the previous bottom. Meanwhile, the price line creates a lower bottom than the previous bottom.
See more: Optimize trading with IC Markets Exchange
Trade when the MA line crosses
The intersection between the MOM indicator line and the MA line can help investors identify potential points for the price to reverse and start a new trend. When combining these two indicators, investors can place a buy order when the Momentum line crosses the MA line. Then place a sell order when the Momentum line crosses the MA line. For the MA line, investors often choose popular periods such as 9, 14 or 21, with longer periods often giving smoother and more accurate results.
Conclude
We have shared what the Momentum indicator is to help investors have more signals to enter orders. From there, traders can apply it to their trading strategy. Don’t forget to continue following to update the latest information and knowledge on Forex Trading!
FAQs
Is using Momentum profitable?
Trend trading can be profitable, but it can also cause heavy losses if you’re not right and the market changes direction. This is why it is so important to research and use the right risk management tools in trading.
What is the best time frame for Momentum?
Trend trading can be applied to all markets and time frames. This method is popular among the short-term trading community such as day traders and scalpers, those who want to open and close multiple positions in one day, as well as long-term investors and traders.
Is Momentum suitable for trend traders?
Momentum is the right choice for swing traders. In this style of trading, the goal is to buy and sell at support and resistance levels, often over shorter periods of time. Momentum strategies can be integrated into swing styles, and are especially useful at support and resistance levels, helping traders evaluate market conditions and trading opportunities.
