In the financial market, momentum refers to the tendency of prices to keep moving in the same direction. This means that rising prices of assets will increase further while falling prices of assets will keep falling.
What is Momentum Indicator?
Technical and oscillator indicators are infamous in the forex world, particularly for currency analysis.
The momentum indicator measures the speed or rate of change of price movement of a financial asset. It oscillates to and from the 100 centerlines, imaginary or given explicitly.
In forex, this is considered a leading indicator.
This is because the momentum indicator can predict likely trend changes even before they occur.
When we analyze the rate of change of price, we can gauge the momentum of an asset or its strength in a currency pair.
For example, if the momentum is accelerating, the price trend is strong and is likely to continue.
The momentum indicator is versatile and can be used as a trend-confirmation precursor.
Ideally, the momentum indicator consists of a single line.
However, some traders do add a secondary line as well.
Strategies for Momentum Indicator
As mentioned earlier, we can utilize momentum indicators to foretell if the market price will continue in the same direction.
The indicator also allows us to figure out situations where a trend reversal might be possible.
The three main strategies for this are defined briefly in the following:
- 100 line cross – we can tell that the prices are moving higher when the price moves from below the 100 lines and crosses it to go to the upside. Therefore, we consider trading from a bullish side. The converse is also true. The prices move lower when the price crosses the 100 lines and goes downwards. We then prefer making bearish trades.
- Crossover signal – we can add a secondary line to a momentum indicator, as noted previously. This line is usually the Simple Moving Average of the momentum indicator. We need to have the momentum and the moving average lines plotted for the crossover signal. We are advised to buy when the momentum line crosses the moving average from below and sell when the momentum line crosses the moving average from above.
- Momentum divergence signals – when the momentum in dictator makes higher lows, but the prices make lower lows, a bullish divergence occurs. Of course, the opposite occurs for a bearish divergence. The divergence allows us, traders, to receive early signals about a weakening momentum, leading to a complete trend reversal or a price retracement.
The Zigzag pattern is an example of this.
It consists of three waves; A, B, C. It is not a predictive strategy, but it is useful to us as we can analyze historical data.
The best momentum indicator is the divergence signal. But the other trading signals are also frequently used.
Momentum indicators are beneficial for traders, so we should always apply them to the market before making any transactions and investments.
Momentum indicators allow us to understand the strength of a currency pair or asset and then trade accordingly.