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Momentum Indicator

 

Momentum Indicator Purpose


Momentum is a technical indicator that illustrates a trend direction and evaluates how fast the price will change by comparing current and past price trends. Accordingly, the Momentum indicator is positive when the existing price is higher than the past’s price. And contrary when the current price is lower than the price in the past, so the Momentum indicator is negative.

FX trader can also use the Momentum indicator as a principal technical indicator. This technique supposes that market tops are naturally identified by a fast price increase when everyone expects prices to go higher. The market bottoms typically end with rapid price declines when everybody wants to get out. Being one of the oscillators, the momentum should be used within price trend analysis.


Momentum Indicator Usage


Momentum indicator is represented by a line which fluctuates around 100. Each value of this indicator is calculated on the basis of the current price and the price some time previously (usually with a 10-14 period lag).


Momentum Buy Signal

When the Momentum indicator crosses the X-axis (above the zero line), so it is a buy signal for a trader. If this indicator is higher than 100 it is a bullish signal. Otherwise if the indicator falls below 100 during a downtrend, a bearish signal appears.


Momentum Sell Signal

Momentum indicator crosses below the zero line and it can generally mean two things:

  • The stock, currency pair, or future's price is on top and is reversing
  • The price has dropped below the bearish signal.
Momentum Exit Signals

Commonly speaking the buy and sell signals covered above are not good exits, moreover selling out of a extended position or buying to cover a short position. At the time the Momentum indicator returns back to the zero line, the majority or all of the profits have probably wrinkled. When the Momentum is overturn line and is heading back towards the zero line, which means profits have been eroded. Momentum indicator not only uses for identifying buy and sell signals. It also helps to detect divergences as an important trading concept.




Momentum Indicator Calculation


The calculation of Momentum indicator is very simple.

N is the number of periods that the FX trader selects.


Momentum = CLOSE (i)/Close (i-n)*100

Where:
CLOSE(i) — is the closing price of the current bar;
CLOSE(i-N) — is the closing bar price N periods ago.

 

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