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Everything you should know about Forex momentum!

Momentum is an indicator that is quite commonly used in forex technical analysis. Understanding how to use the Momentum can help investors completely change the way they view the market and predict price trends. In this article, Forex Trading will share complete information related to the momentum. Covers the concept, settings, and how to effectively trade with this indicator. Let’s follow along!

Overview concept of Momentum

The Momentum indicator is trusted and widely used by many technical analysts. This indicator (also known as the indicator) helps identify trend reversal points. Therefore, it is an effective technical tool in trading strategies.

What is Momentum in Forex terms?

(MOM) in English terminology means Momentum. In the forex field, it is understood as the strength of the trend. Momentum Indicator is an indicator used to perform the functions of measuring and evaluating the rate of change in price.

The Momentum indicator compares the current closing price with the closing price “n” periods ago. Aim to make a technical judgment. Based on this, traders decide whether to buy or sell. And estimate the potential profit of a trade or see if the trend will reverse soon.

Although many traders consider Momentum to be a type of Oscillator. But this is probably completely incorrect. Momentum indicator can be used as an Oscillator and also as a trend indicator.

Traders rely on the parameters provided by the indicator to determine the strength behind the current trend. This helps them accurately predict whether the market will reverse or continue its trend. From there, you can make more accurate forex trading decisions.

The Momentum indicator is trusted and widely used by many technical analysts
The Momentum indicator is trusted and widely used by many technical analysts

What is Momentum’s role?

Helps investors see an overview of the strength of the trend:

  • The rising indicator shows that the forex market trend is increasing and quite sustainable.
  • The falling indicator shows that the old market trend is weakening and is likely to reverse.

Helps traders analyze price behavior more deeply:

When digging deeper into the indicator, traders discovered that Momentum also existed in each candle body. Specifically:

  • A candle with a long body and no shadow is considered a strong candle (Marubozu candle). This proves that the Momentum force is high.
  • In contrast, a candle has a short body with one or both long shadows. This is considered a weak candle and low Momentum.

Thus, by simply comparing bullish candles, bearish candles, and the strength of each candle, investors can measure the strength of the market trend at that time. This helps in a deeper analysis of price behavior.

Provides forex traders with 3 important signals:

  • When the Momentum indicator crosses the 100 line, it shows an overbought or oversold signal. Or it could be that the price is moving fast or slow.
  • When the Momentum line crosses the MA line (moving average line), it helps traders find the point where the price shows signs of reversing.
  • When the line of the Momentum indicator diverges or converges with the price line. This shows that the price is trending towards a reversal. However, in a strong trend, this signal is quite weak and susceptible to noise.

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What is the correct way to calculate Momentum?

The Momentum indicator is relatively easy to calculate, based on the closing prices of trading sessions. The Momentum calculation formula will be calculated as follows:

Method 1: Momentum = Current closing price (Close i) – The closing price of n previous sessions (Close in)

Method 2: Momentum = (Close i / Close i-n) * 100

In there:

  • Close i is the closing price of an ith forex trading session.
  • Close in is the closing price of a forex trading session. Where n is the number of previous forex trading sessions performed.

The period denoted “n” can be any trading period. Such as 10 days (default for MOM) or any period defined by the investor. This formula was developed for markets with specific opening and closing times. It could be from 9 am to 3 pm.

Determining Momentum in method 1 is mainly based on the price difference between trading sessions. Meanwhile, calculation 2 not only shows the rate of change but also helps investors see the nature of an indicator.

The Momentum indicator is relatively easy to calculate
The Momentum indicator is relatively easy to calculate

Instructions on how to install Momentum on some popular trading platforms

Similar to other technical indicators, setting up Momentum is quite simple. Below, Forex Trading will guide you on how to install the Momentum Indicator on MT4 and TradingView.

Install Momentum indicator on MT4 forex

Currently, the Momentum indicator has been integrated into the MT4 software. To activate this indicator, follow these steps:

Step 1: On the menu bar on the MT4 home page, select Insert -> Indicators -> Oscillators -> Momentum.

Install momentum indicator on MT4
Install momentum indicator on MT4

Step 2: After setting up the indicator, the screen will display the Momentum dialog box as shown below:

The screen will display the Momentum dialog box
The screen will display the Momentum dialog box

This dialog box includes Parameters, Levels, and Visualizations (display time frame).

  • In the Parameters section: Enter the period in the Period box (usually MT4 defaults to 14 days).

Select the price to analyze in the Apply to the box (usually the closing price. However, traders can also choose the highest price, lowest price, opening price,…).

Adjust the color and style of the Momentum line in the Style section (dark or light, broken or solid).

  • In the Level section: Set the line to 100 by clicking Add and entering 100.
  • In the Visualization section: Traders can choose the time frame they want to analyze.

Parameters are usually set by default. If you feel it is suitable for your strategy, select OK without needing to reset. Besides, you can customize the parameters as you like.

How to use momentum on Tradingview?

Similar to many other software, TradingView only supports a few popular indicators for free, including the Momentum indicator. Installing this indicator on the chart is very simple, follow these steps:

Visit the official homepage of the Tradingview platform. Then select “Chart” and select “fx” as shown below. Next, traders enter the word “ Momentum ” into the search box, then click on this indicator as shown.

Use momentum on Tradingview
Use momentum on Tradingview

To set parameters for the indicator, click on the (settings) wheel image on the indicator.

  • To set the cycle, fill in the first box.
  • To set up the Momentum line, fill in the second cell under “Input”.
  • If you want to adjust the colors, click the “Format” tab.

How to use Momentum in basic trading

The forex trading method with the Momentum indicator corresponding to each signal that this indicator provides to investors has been mentioned in the role section. Below are details of each specific trading signal:

Trading signal when the Momentum line crosses the 100 line

When the Momentum indicator line goes up and crosses the 100 line, this shows that the buyers are dominant and the market is likely to continue to rise. At this time, traders can place buy orders (Buy) according to the trend.

On the contrary, when the Momentum line goes down and crosses the 100 line, this proves that the sellers are taking advantage and the price is likely to continue to decrease. This is the most potential signal for traders to enter a sell order.

However, traders should note that the 100 lines and the Momentum indicator line intersect very often, and the signals emitted are often quite weak. Therefore, you should combine some other technical analysis indicators when using indicators.

Trading signal when the Momentum line crosses the 100 line
Trading signal when the Momentum line crosses the 100 line

What does the Momentum indicator converge or diverge with the price line show?

Investors have become familiar with convergence and divergence signals. Determining divergence or convergence is based on the peaks and troughs formed by the Momentum line and the price line. Specifically:

  • Divergence will appear when the Momentum line creates a lower peak than the previous peak. However, the price line at this time creates a higher peak compared to the previous peak.
  • Convergence occurs when the Momentum line creates a higher bottom than the previous bottom. But the price line at this time creates a lower bottom than the previous bottom.

When a convergence or divergence signal appears, traders know the price tends to reverse. However, this signal is often weak when divergence or convergence appears. Especially when the price is moving in a strong trend, these signals are susceptible to noise. Therefore, traders should not completely trust this reversal signal. To increase trading accuracy, it is best to combine Momentum with many other indicators.

Investors have become familiar with convergence and divergence signals
Investors have become familiar with convergence and divergence signals

What should you do when the Momentum line crosses the MA line?

Combining these two indicators will help investors identify points where prices may reverse. At the same time, it can start a new trend. In this case, you can combine it with moving averages (MA) with different periods. However, according to professional traders, the most popular cycles are 9, 14, and 21. The longer the cycle, the smoother and more accurate the trading.

  • If the Momentum line goes up and crosses the MA line, investors can open a Buy order.
  • If the Momentum line goes down and crosses the MA line, investors can open a Sell order.

Note: This signal is often quite weak, so to increase accuracy, investors should combine it with other signals. At the same time, you should use a combination of the Momentum indicator and the 100 line. This is the perfect suggestion for this case.

The Momentum line cuts the MA line
The Momentum line cuts the MA line

What types of indicators should Momentum be combined with?

Traders can combine the Momentum indicator with RSI, MACD Trading Strategy, PSAR… Or moving average MA to find accurate trading opportunities.

For searching for Buy orders:

Traders will look for Buy orders when there is a “confluence” phenomenon between the indicators:

  • The Momentum line crosses the reference line 100 and points up.
  • RSI shows price entering the oversold area, signaling price growth.
  • MACD and Signal lines cross each other upward. The histogram chart changes from decreasing to increasing.
  • PSAR shows dots moving from top to bottom. This shows that the bearish correction has ended and the price is ready to increase according to the main trend.
  • The MA line crosses the Momentum line from the bottom up.

For searching for Sell orders:

  • The Momentum line crosses the reference line 100 and points downward, supporting downward.
  • RSI entered the overbought zone, signaling a bearish reversal. Traders can also use the downward cross signal to confirm this signal.
  • MACD indicator and Signal lines intersect and point down. The Histogram chart also shifted from increase to decrease, supporting the sellers.
  • PSAR dots move from bottom to top. It signals the end of the upward correction.
  • The MA line crosses the Momentum line from top to bottom.
Traders can combine the Momentum indicator with RSI, MACD Trading Strategy, PSAR...
Traders can combine the Momentum indicator with RSI, MACD Trading Strategy, PSAR…

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How to read the Momentum indicator correctly

The price on the chart represents the acceleration of the trend. The indicator will increase when the trend is increasing and decrease when the trend slows down.

In trading, Momentum is the rate of change of an asset’s price over a specific time:

  • When the current price increases rapidly, the value increases sharply.
  • When the current price drops rapidly, the value drops sharply.

Indicator: Meaning and Applications. These are the main points:

  • When the indicator is above zero, an uptrend is likely underway.
  • If the indicator is above zero and rising. This shows that the uptrend is accelerating faster. That is, the market is in a period of strong growth and it is likely that prices will continue to increase.
  • When the indicator is below zero, there may be a downtrend.
  • If the indicator is below zero and is falling. This shows that the downtrend is increasing. It means the market is in a strong bearish phase, with the possibility that prices will continue to fall.
  • When the indicator starts to increase but remains below zero, the trend is still down but the rate of decline is more gradual. This suggests that the downtrend may be weakening, but is not necessarily reversing.

Identify potential buy signals through the Momentum indicator

When the line crosses bullish zero, a potential buy signal appears. This signifies that the price of a stock, futures contract, or currency pair is starting an uptrend or an upward correction.

What is Momentum’s potential sell signal?

When the line crosses the zero bearish line, a potential sell signal appears. This signifies that the price of a stock, futures contract, or currency pair is starting a downtrend or a descending correction.

The Momentum indicator shows a potential exit signal

When the energy indicator approaches zero, this could signal an exit from the position. However, relying solely on this signal to exit the market can result in significant profit loss. Even leading to losses.

To avoid this, some traders focus on how volatile the indicator is compared to previous data. If the indicator has fallen deeply below the 0 level. This may be the time to profit from closing the sell order. If the indicator has increased significantly from the 0 level. This may be the time to profit from closing the long order.

Another variation of the market exit signal is when the indicator crosses its trendline. When the forex market trend line is broken in the opposite direction of the order. That is the moment when the trader can close the position.

Another variation of a market exit signal is when there is a divergence between the price chart and the indicator. For example, a sell exit signal may appear when the price breaks above a local low while the energy indicator fails to produce a lower low.

Based on the above examples, it can be concluded that the interpretation of signals is a complex approach. You need to clearly understand current market psychology. Don’t just rely on indicator signals but also consider the rules of your trading strategy.

How to read the Momentum indicator correctly
How to read the Momentum indicator correctly

Conclude

In this article, Forex Trading has provided detailed information about the Momentum indicator and how to trade with Momentum. Hopefully, this will help traders receive more signals to apply to their trading strategies effectively. Don’t forget to follow Forex Trading to be more successful when trading with the Momentum indicator!

Frequently asked questions

Why does an energy-based strategy work?

Energy-based strategies work because they are based on logical reasons. If the current price is higher than the past price, it is a sign of an uptrend. Conversely, if the current price is lower than the past price, it indicates a bearish trend.

What is measured by energy?

Energy measures the difference between the most recent closing price and the closing price in periods ago.

What are the best energy indicators?

The best energy indicators include the Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), and the Stochastic Oscillator.

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