What is momentum is one of the questions that many people ask. The Momentum indicator is a tool used to identify reversal points in price trends in financial markets. If you know how to use this indicator, it will help investors have a more general view of the price trend. Therefore, to better understand this issue, please refer to Forex Trading‘s article below now!
What is momentum? General information about the Momentum indicator
What is momentum? What are the characteristics of the Momentum indicator and what is the formula for calculating it? Below is some information about this indicator that you can refer to immediately.
Concept what is momentum?
Momentum indicator in specialized English means momentum. But in the Forex field, it can be understood as the power of the trend. Accordingly, this type of indicator has the function of measuring and evaluating the speed of price change. At the same time, Momentum is often used in technical analysis. To reflect price changes to help investors see current market trends.
Characteristics of Momentum indicator
Like other types of indicators on the Forex exchange, the Momentum indicator also has some characteristics such as:
- The Momentum indicator can be used in any timeframe.
- The Momentum line will usually fluctuate around the 100 line (the average level on the price chart). The farther the momentum line is from 100, the stronger the price fluctuations will be.
- The distance of the momentum line from the 100 line is intended to help the trader know how fast the price is moving.
See more: Everything you should know about Forex momentum!
What is momentum?
To be able to calculate Momentum, it is necessary to know the exact formula. Below is the basic formula to calculate the Momentum indicator:
Method 1: Momentum = Closing price at the current level – Closing price at the previous period’s closing price
Method 2: Momentum = (Current closing price/Closing price in the previous period)*100% In which:
- The current closing price is the closing price of the asset during the current trading session.
- The previous closing price is the closing price of the asset in the previous trading session.
Meaning of the indicator what is momentum?
Below are some important meanings of the Momentum indicator that investors can refer to:
- Determine the price trend: When the price of an asset increases and Momentum also increases, it shows that the price uptrend is strengthening. When the price of an asset decreases and Momentum decreases, it shows that the downtrend is strengthening.
- Measure the strength of the trend: A high Momentum value shows that the current price trend is likely to continue increasing in the future.
- It means determining buying and selling points: The momentum indicator begins to increase after a price decrease. This could be a sign that the downtrend has ended and a new uptrend is about to begin. And vice versa, when Momentum decreases, the downtrend begins.
- Early detection of reversal points: Asset price moves in one direction but Momentum moves in the opposite direction. This could be a sign that the trend is about to reverse.
How to use what is momentum?
What is momentum has been answered in the information section above. Below, Forex Trading will show you how to use Momentum quickly and effectively:
How to use Momentum when crossing the 100-line
When the Momentum indicator goes up and crosses the 100 line, this stage shows that the buyers are more dominant. At the same time, it can show the possibility that the market will continue to increase in the future. At this point, traders can place buy orders following the trend.
Similarly, when the Momentum line tends to go down and crosses the 100 line. This proves that the sellers are taking advantage and the price will likely continue to decrease. This is a potential signal for investors to execute a sell order.
However, traders need to note that the 100 lines and the Momentum indicator line intersect very often. Therefore, you need to combine some other technical analysis indicators such as lines support resistance, MACD, and RSI…
Trade the Momentum indicator with divergent or converging price lines
The process of determining divergence or convergence often depends on the tops or bottoms formed by the Momentum line and the price line. Specifically:
- Bullish divergence: Bullish divergence occurs when price creates a higher peak but Momentum creates a lower peak. This could be a sign that an uptrend is about to end and a downtrend is about to begin. So investors should buy.
- Bearish divergence: This line occurs when price creates a lower low but Momentum creates a higher low. This signals that the downtrend is about to end and the uptrend is about to begin. This sign requires selling to avoid losses.
- Bullish Convergence: Bullish price convergence occurs when price and Momentum both create a higher peak. This is a sign that the uptrend is strengthening and investors should place buy orders.
- Bearish Convergence: Usually occurs when price and Momentum both create a lower bottom. So it can show that the downtrend is gradually increasing and users are quickly placing sell orders.
Use Momentum when cutting the MA line
Combining Momentum when cutting the MA line helps investors easily find the point where the price will reverse and start a new trend. In this case, the trader can combine this execution in different cycles. However, according to investors, cycles 9, 14, and 21 are the most commonly used. As follows:
- If you see Momentum increasing and cutting the MA line, you can place a buy order
- If the Momentum indicator goes down and crosses the MA line, investors can execute a sell order.
See more:Broker XM: Explore the world of Forex fingertips
Notes when using what is momentum?
Learn about what is momentum and how to use Momentum. Investors need to note a few things when using the Momentum indicator as follows:
Momentum is not always accurate, so it needs to be determined to have the most objective and comprehensive view.
Momentum can create false signals, causing investors to make wrong decisions. So it is necessary to clearly determine the trend before actual trading. To avoid encountering risks that cause serious damage to assets.
Momentum is just one tool among many available technical analysis tools. Therefore, investors should use Momentum in combination with other analytical tools. For example, trend lines, and trading volume… to make informed investment decisions.
In addition to Momentum, investors need to pay attention to other factors such as news, and economic data… when making investment decisions.
Trading any asset involves risk. Therefore, investors need to manage risk carefully when using Momentum. It is necessary to set a reasonable stop-loss point and adhere to trading discipline.
Conclude
The above article has provided information what is momentum, characteristics, calculation formula, meaning, and effective use. Hopefully, it will help you easily detect signals and apply effective orders in transactions. Although the Momentum indicator is trusted by many investors, it should still be combined with other indicators to increase the probability of accuracy. After reading the article, if you have any questions, do not hesitate to contact Forex Trading immediately!
FAQS
How many types of Momentum indicators are there?
Currently, popular Momentum indicators are the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator.
What tools should I combine Momentum with?
To use Momentum effectively, investors should combine it with other tools such as trend lines, trading volume, etc.
Is Momentum the perfect analytics tool?
Momentum is a useful technical analysis tool but not a perfect one.
