What is Oscillator? Momentum MACD are Oscillators that are no longer strange to financial investors. In this article, Forex Trading will provide basic knowledge about the Momentum indicator and MACD indicator. The article will also show you how to combine Momentum MACD to improve investment efficiency, so follow along now!
Learn about 2 Oscillator group indicators: Momentum MACD
Momentum MACD are two of the most used indicators of the Oscillator group. Momentum MACD helps traders recognize the overbought and oversold conditions of the market.
What is Oscillator? Top 4 Oscillators to use the most
If you don’t know what an Oscillator is, this is an oscillating indicator. The oscillator will maximize its effectiveness in the following cases:
- Used to identify overbought or oversold conditions when the market is not trending.
- Used to analyze the market when price increases/decreases are unclear.
- Determine whether the market is overbought or oversold. For example, a trader is considering two types of assets to trade. After selecting assets, traders will set up the Oscillator to observe their trend. Whichever asset the oscillator points towards more, that asset is overbought. The oscillator oscillates towards a lower value asset then that asset is oversold.
There are 4 types of indicators in the Oscillator group that are considered the most useful for traders including:
- Momentum indicator: helps determine the up or down price trend of an asset. Momentum can also evaluate the possibility of prices returning to orbit.
- Stochastic indicator: supports comparing the value of assets between different times and locations.
- RSI indicator (Relative Strength Index): supports analysis of price fluctuations. RSI also helps traders evaluate the fair valuation of a currency pair based on the current market value.
- MACD indicator: provides effective entry/exit point forecasting signals for investors.
See more: Everything you should know about Forex momentum!
Introduction to Momentum indicator
Momentum indicator is a tool that measures the speed of price fluctuations. Momentum also represents a change in market sentiment. Momentum reaching the overbought/oversold zone is a signal that the market is about to reverse.
Introduction to the MACD indicator
MACD is the abbreviation for the phrase “Moving Average Convergence Divergence”, also known as “Moving Average Convergence/Divergence”. The MACD indicator is created from two trend-following moving averages, through the math of subtracting the shorter average from the longer average. The strength of MACD is to provide reliable trading signals based on trend and momentum.
When moving averages converge, cross, or diverge, the MACD will oscillate above or below the zero line. The intersection between the signal line (EMA 9), the center line (level 0) and the divergence can provide buy/sell signals for traders. However, because there is no limit, MACD cannot provide accurate information about overbought/oversold areas. When combined with Momentum MACD, it will give more accurate and specific identification results.
Formula to calculate Momentum MACD indicator
Let’s learn how to calculate the two Momentum MACD indicators right now.
Momentum calculation formula
There are 2 ways to calculate Momentum, of which the popular formula was developed by John J. Murphy. Murphy suggests calculating momentum value by subtracting the current closing price from the closing price of a fixed period in the past. Murphy’s Momentum calculation formula is as follows:
M(j) = CLOSE(j) – CLOSE(j – n) , with:
- M(j) is the Momentum value.
- CLOSE(j) is the most recent closing price.
- CLOSE(j – n) is the closing price of n periods ago.
The coefficient n is a custom value set by the trader in the indicator’s settings. The default value for the coefficient n is 10 or 14. The most common indicator value is 21. According to this formula, the final result can be negative or positive. However, according to some traders, the indicator value around 0 is not a very positive market signal. Steve Achelis therefore proposed another formula as follows:
M(j) = CLOSE (j) x 100 / CLOSE (j – n) , with:
- M(j) is the Momentum value.
- CLOSE(j) is the most recent closing price.
- CLOSE(j – n) is the closing price n periods ago.
The main difference between the two versions of the formula lies in the way the indicator is presented. The second version uses a relative format with values fluctuating around 100, instead of 0 like the first version. However, the difference in value is not significant, so traders can use any version.
MACD calculation formula
The MACD calculation formula includes 3 steps:
- Step 1: Calculate MACD line = EMA(12 days) – EMA(16 days)
- Step 2: Calculate Signal line = EMA (9 days) of MACD line
- Step 3: Calculate Histogram = MACD line – Signal line
The direction of movement of the MACD line relative to the signal line determines the value of the histogram. The histogram is positive when the MACD moves above the signal, and the histogram is negative when the MACD moves below the signal. Although 12, 26, and 9 are popular parameters for MACD, traders can still flexibly change them to serve their goals.
See more: Discover Exness – The world’s leading Broker
What is the effective way to combine the two Momentum MACD indicators of the Oscillator group?
In investing, you cannot rely on one indicator to make decisions. Let’s find out how Momentum MACD is related to technical analysis.
Meaning of 2 Momentum MACD indicators
First of all, let’s consider the meaning of the 2 Momentum MACD indicators. Momentum is the first momentum indicator to be created. The role of Momentum Indicator includes:
- Based on the relative position of the Momentum line compared to the reference line, traders can predict the upcoming market trend up/down or sideways movement.
- When the Momentum indicator appears to diverge from the price line, this is a signal that a market trend reversal is about to occur.
- Momentum also helps investors identify potential buying and selling signals. When the oscillator breaks out of the negative area and crosses the zero line, it is a buy signal. If the oscillator penetrates the positive zone and falls below the zero line, it is a sell signal.
The difference between MACD and Momentum is that it helps traders analyze price trends. MACD’s role includes:
- MACD helps traders forecast price trends. MACD’s signal line crossing from below signals an upward price trend, recommending traders to buy. MACD’s signal line crossing from above signals a downward price trend, recommending traders to sell
- MACD convergence/divergence will help identify price movements. MACD pointing down when the price is in an uptrend can be a sign of a reversal to a decrease, traders can consider selling. MACD pointing up when the price is in a downtrend can be a sign of a reversal to an increase, traders can consider buying.
How to combine Momentum MACD
Due to the lack of specific thresholds, determining the overbought/oversold zone when using the Momentum indicator will be very subjective. Although it belongs to the Oscillator group, Momentum’s limitation compared to RSI is that it cannot draw additional support and resistance lines. This is an support and resistance advanced method that helps traders predict potential price points where a market reaction will occur. Traders will thus avoid mistakes in buying and selling.
However, we can combine Momentum with a momentum oscillator. Momentum indicators often combined with Momentum include MACD, RSI, Bollinger bands,… This combination will add additional information about support and resistance levels that the Momentum indicator cannot show. This article will only focus on the relationship of Momentum MACD.
MACD is one of the popular oscillators developed based on Momentum. Compared to Momentum, MACD provides information about price movements with greater “smoothness”. In the image below, the MACD line crosses above the Signal line, but there is no buy signal. As a general rule, for a buy signal, the MACD line needs to fall below the zero line first.
summary
Thus, the article has provided information about the relationship of Momentum MACD. It can be seen that the Momentum indicator and the MACD indicator both have their own advantages in technical analysis. Traders should combine many different indicators to grasp the market. Don’t forget to follow Forex Trading to update useful knowledge about investing.
FAQs
What factor is the Momentum indicator used to measure?
Momentum is used to measure the rate of price fluctuations. Momentum calculates the difference between the current closing price and the closing price in periods ago.
How are Momentum and Oscillator different?
Momentum indicators can be classified into two large groups: trend indicators and oscillators. Momentum helps investors identify market trends. The momentum oscillator will provide information about overbought/oversold areas.
Momentum MACD: which indicator is better?
Momentum MACD was developed with different characteristics and purposes. Depending on the purpose of use, investors will need to choose the appropriate tool. Momentum is used to calculate the rate of price fluctuations. Meanwhile, MACD will be useful to analyze price trends.
