The Momentum indicator is trusted and used by many technical analysis traders. Momentum indicator (also known as momentum indicator, momentum indicator) identifies trend reversal points. Therefore, it is an effective technical indicator in trading strategies

In today’s article, we will learn together what the Momentum indicator is, how to use the momentum indicator on the MetaTrader 4 (MT4) trading platform, how to apply the momentum indicator to a trading strategy, and how to use it. use the MT4 Momentum Indicator to confirm the trend.

What is Momentum indicator? What is the Momentum indicator?

First, we will learn together what is a momentum indicator.

Watching: What is Momentum

Momentum indicator (MOM) is a momentum indicator commonly used in technical analysis. The Momentum indicator measures the rate of change of a security’s price over a certain period of time.

Momentum in stocks indicates bullish and bearish periods, helping traders identify the strength behind the current market trend.

▶ The Momentum indicator measures the strength of the market trend. As a result, traders know whether the trend will continue or reverse and make more accurate trading decisions.

Market trends are an important concept in technical analysis. A lot of trading strategies depend on the market trend — whether the market is trending or sideways, the trend is just starting or coming to an end. This information is extremely useful to traders and the momentum indicator is the way for traders to determine the above information.

There are now many momentum indicators used to measure trend strength. In which, there are a few popular indicators are:

Stochastic Oscillator Moving Average Convergence Divergence (MACD).

If you want to learn about MACD and other indicators, traders can study the article The most important technical indicators today. RSI and Stochastic are both momentum indicators, meaning their values ​​will move in a limited range (usually between 0 and 100). In today’s article, we will learn about the momentum indicator – a momentum indicator that fluctuates around the value of 100.

Similar to the RSI and Stochastic, the momentum indicator helps traders determine when the market is overbought and oversold. As a result, traders know if the market has enough momentum to drive the current price trend. If the market is oversold, it is likely to bounce back. An overbought bull market is likely to fall.

What is the formula for calculating the momentum indicator in stocks

?Traders can use a momentum indicator to determine the strength of a price trend on a trading chart. The formula for calculating the momentum indicator compares the closing price of the current session (CA) with the closing price of the previous N trading sessions (CP).

Therefore, traders have the following formula for calculating momentum indicator:

Momentum indicator is a technical indicator that fluctuates around a value of 100, depending on whether the current closing price is higher or lower than the closing price of the previous N trading sessions.

Example: If the current closing price of the EUR/USD currency pair is 1.1000 and its 14-day closing price is 1.0950, in an uptrend, the Momentum indicator (14) will be equal to:

Forex Momentum (14) = (1.1000 / 1.0950) x 100 = 100.45

Conversely, if the current closing price of the EUR/USD currency pair is 1.1000 and its 14-day closing price is 1.1050, in a downtrend, the Momentum indicator (14) will be equal to:

Forex Momentum (14) = (1.1000 / 1.1050) x 100 = 99.54

After knowing how to calculate the Momentum momentum indicator, traders will understand how to read it

How to read the momentum indicator

The momentum indicator helps traders determine when a security’s price is going up or down, as well as how strong or weak it is.

Momentum indicator levels:

When the momentum indicator is greater than 100, the current price will be higher than the price of “n” previous trading sessions. When the momentum indicator is less than 100, the current price will be lower than the price of “n” previous trading sessions.

The momentum indicator is above and further away from the 100 axis, the faster the price rises. The momentum indicator is below and further away from the 100 axis, the faster the price falls

The momentum 102 indicator has a stronger bullish trend than the momentum 101 indicator. On the contrary, the momentum 98 indicator has a stronger bearish trend than the momentum 99 indicator.

➤ The further away the momentum indicator is from the 100 axis, the stronger the uptrend (bearish) is.

The calculation and reading of the momentum indicator is quite simple, but now it is even simpler with the help of advanced trading platforms. These platforms automatically calculate and display the momentum indicator on trading charts with just a few clicks.

How to download the Momentum Indicator MT4 and MT5

The Momentum indicator is one of the many default indicators on the MetaTrader trading platform. The MT4 or MT5 platform automatically calculates the momentum indicator on behalf of the trader.

Traders just need to download MetaTrader 4 and MetaTrader 5 platforms and add the indicator momentum is tradable momentum indicator with Admiral Markets.

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➤ On the MetaTrader 4 platform, traders access the Trade.MT4 account, and on the MetaTrader 5 platform, they access the Trade.MT5 account. MT5 accounts have more financial instruments, especially stocks.

The momentum indicator is available on both of these platforms. Therefore, traders do not need to download or install it. Traders just need to find it in the “Navigator” window, then select Indicators – Oscillators – Momentum.

To add the momentum indicator to the chart, traders simply drag and drop or double click on it

By default, the 100 axis does not appear on the chart, but traders can easily add it using the “Levels” tab in the parameters section of the indicator.

Click on the banner below to download the FREE MetaTrader 5 platform and use the Momentum indicator today!

How to use Momentum Indicator in Forex

To interpret the Momentum indicator, traders need to be concerned with the 100 axis.

➤ If the momentum indicator moves above the 100 axis, the price trend is up,

➤ If the momentum indicator moves below the 100 axis, the price trend is down.

In addition, the momentum indicator also helps traders to determine trend strength. The further away the momentum indicator is from the 100 axis, the stronger the uptrend (bearish) and vice versa.

Below is a chart of EUR/USD with Momentum indicator (21) which helps traders to better understand how to read the momentum indicator.

How to set up the Momentum momentum indicator

The default parameter of the momentum indicator on the MetaTrader platform is 14, like most other momentum indicators. In this case, the closing price of the current trading session is compared with the closing price of 14 previous trading sessions.

Some traders are satisfied with the default parameter above, but others are not. They want to reset the settings to better signal the trend for their trading strategy.

Before resetting the momentum indicator, traders need to remember that:

The larger the number of trading sessions, the weaker the momentum indicator, the fewer trading signals, and the more likely the price trend is to lag behind the real market trend. The smaller the number of trading sessions, the more volatile the momentum indicator, and can cause false signals.

The image below shows the Momentum 100 (blue) and 5 (red) indicators. A value that is too high and one that is too low shows a clear difference when using different momentum indicator parameters.

Traders often change the default parameter 14 to 21 to improve the quality of trading signals that the momentum indicator gives. Traders can also change 14 trading sessions to 50 in case of high volatility in financial markets.

Try different trading sessions to find the N sessions that best fit the investment timeframe chosen by the trader.

It is best for traders to use a demo account to test the setup of a virtual currency trading strategy. Click the banner below to open a demo account now!

Momentum indicator trading strategy with moving average

Traders can add a moving average to the momentum indicator on the MetaTrader platform by clicking on the Moving Average under “Trend” , then dragging and dropping it onto the Momentum indicator chart. Now the screen appears a dialog box as below.

In the parameters section, select “First Indicator”s Data” in the “Apply to” menu. Then, select the number of trading sessions of the moving average (in this case 100) and then press confirm.

Some traders use a simple moving average (SMA) to flatten the curve of the Momentum indicator. This method not only helps traders visualize the overall trend of Momentum indicator better, but also helps traders build and develop trading strategies with momentum indicator and moving averages.

The crossover point between the momentum indicator and the moving average is a trading signal that helps a trader know whether to open a long or short position, just like regular moving average trading strategies. However, this time we will use the moving average and the momentum indicator.

This combination helps traders find trading signals before the momentum indicator crosses the 100 axis, but it also has a problem to be aware of, which is false price signals.

Traders need to test multiple moving averages and the Momentum indicator before finding the combination that best suits their trading style.

➨ Buy signal: The Momentum Indicator crosses above the moving averages

➨ Sell signal: Momentum indicator crosses below the moving average

➨ Exit signal: When the Momentum indicator crosses the moving average in the other direction

In the above example, we can see that the first two buy and sell signals are already very clear.

However, the second sell signal is not clear. Why? At that time, the Momentum indicator was above and quite far away from the 100 axis (a strong uptrend). This shows that the change in cents direction is unlikely and the price correction is also quite small.

In the last black rectangle, the Momentum indicator is fairly flat, showing that the trend has no strength and is in a sideways zone. This is reflected in the price of the USDJPY currency pair.

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How to use Momentum indicator in technical analysis

The Momentum indicator can be applied to many momentum strategies, like trend trading and countertrend trading. To use the momentum indicator effectively, traders need to analyze it on many different timeframes, starting from the longest to the shortest. This allows traders to analyze from the underlying trend to the trading trend they want.

To use the momentum indicator in swing trading, a trader can start on the daily chart, then on the H4 chart, and then finish on the hourly chart. To use the momentum indicator with day trading, a trader can start with H4 chart, then H1 and end analysis on M30 chart. To use momentum indicator in scalping, traders can start analysis on M30 chart, then go down M15, before ending at M5 or M1.

Short timeframes are used to read Momentum trading signals, while long timeframes are used to identify trends, possibly the end of the trend.

The Momentum indicator should not be used alone, but should be combined with other analysis tools, such as charts (support, resistance, trend lines, Japanese candles …) or other technical indicators..

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Now, let’s go through some more advanced Momentum trading strategies together.

Divergence with Momentum Indicator

Traders can use divergence between price and momentum indicator to make trading decisions:

⇨ Bullish Divergence: The price of the trading instrument falls, but the bottoms of the momentum indicator rise. This shows that when the price falls, the selling momentum slows down.

⇨ Bearish Divergence: Occurs when the price is rising, but the peaks of the momentum indicator are falling. This shows that as the price rises, the buying momentum slows down.

On this chart, we see a bearish divergence between the EURUSD price and the momentum indicator. While the EUR/USD price reached new highs, the Forex Momentum indicator did not confirm the rise but formed lower highs than the previous highs.

This shows that the currency pair is about to reverse its price. Traders should not use momentum divergence as a trading signal, but should only use it to reconfirm trading signals from other strategies or to anticipate an upcoming reversal.

While divergence with the momentum indicator gives the most reliable reversal signal, it also carries a large risk because a market reversal can happen after a few candles since the warning.

In fact, this is an advanced reversal signal, traders will often see several candles appear before the trend reverses.

In addition to Momentum divergence, RSI divergence is one of the divergences appreciated and used by traders.

Trading Strategy with Momentum Indicator – Trend Reversal

The momentum indicator can identify trend reversal points. However, in this momentum strategy, traders need to combine it with another tool to improve accuracy and eliminate false signals.

We will combine it with another indicator to identify trend reversals. Here, Admiral Markets will use the Keltner channel. The Keltner Channel uses the upper and lower bands to find potential price reversal areas.

The Keltner indicator is not available on the regular version of MetaTrader, but traders can use it for free with the MetaTrader Supreme Edition. Click on the banner below and use the Keltner channel and other free trading tools with Admiral Markets today!

Now, we will study together the trading signals in this strategy with the Momentum indicator and the Keltner Channel:

Trading Signals: When both indicators simultaneously show a price reversal signal.

For the Momentum indicator, we can plot and observe its extreme points on the chart of the trading tool on the desired timeframe. Example: If the momentum indicator is rarely greater than 103 and less than 98, then:

➨ Buy Signal: During a downtrend, a reversal/buy signal occurs when the momentum indicator touches or exceeds the lower extreme (98 in the example above) and the price touches the lower band of the Keltner Channel.

➨ Sell signal: During an uptrend, a reversal/sell signal occurs when the momentum indicator touches or exceeds the upper extreme area (in the example above 103) and the price touches the upper band of the Keltner channel.

➨ Exit Signal: When the momentum indicator reaches the opposite extreme or when the price touches another Keltner band.

Trend reversal trading is most used with divergence or extreme momentum indicator. To understand the logic behind these strategies, we will use the principles of physics to illustrate. A truck traveling at full speed on a road is very difficult to turn around and still maintain this speed. Therefore, it must first slow down and then turn.

The same goes for market prices. Once a trend is established and active, its speed in momentum needs to decrease before a reversal occurs. Therefore, these strategies are most effective after a trend and should not be used during periods when the market is not trending. Also, they will perform better on long-term timeframes, on H1 and above.

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Trading Strategy with Momentum Indicator – Trend Following

Instead of having to enter the market early to look for a trend reversal, the Momentum indicator can help traders enter the market when the established trend is getting stronger and stronger.

With the momentum indicator, the trader loses the opportunity to take full advantage of the price action, but can avoid more risk because of fewer false positives.

For this strategy we will use momentum indicator (21), moving average (5) and moving average (20)

➨ Buy signal: During an uptrend, a trend/buy signal occurs when the momentum indicator breaks to 100 and the 5-period moving average is above the 20-period moving average.

➨ Sell signal: During a downtrend, a trend/sell signal occurs when the momentum indicator breaks below 100, and the 5 moving average is below the 20 moving average.

➨ Exit signal: When the momentum indicator drops below 100 or the moving averages cross each other in the opposite direction.

How to use Momentum indicator as a trend confirmation tool

Momentum indicator is one of the best signal confirmation momentum indicators available today.

In short, buy or sell signals will be taken by other technical indicators. Next, we will confirm the above signal via the momentum indicator: Whether the momentum indicator crosses up or down 100, how the moving averages intersect, the extreme points or even the momentum divergence. period.

▶ Traders should only use trading signals from the main indicator or main set of indicators after being confirmed by the Forex Momentum indicator.

This combination of indicators is extremely useful because they complement each other’s shortcomings.

Traders can also combine the momentum indicator with indicators that measure volatility. Bollinger Bands are one of the most famous indicators for measuring volatility.

The fact that the Bollinger Bands widen during periods of high volatility and narrow during low volatility is a signal for currency traders. Bollinger Bands compress as volatility drops to lows. After these periods, the market often fluctuates significantly.

However, the Bollinger Bands cannot indicate the upcoming momentum and trend of the market. Therefore, we need to combine it with the Momentum indicator.

Trading with momentum indicator – Conclusion

Momentum indicator is a useful technical indicator with high applicability. Traders can use the momentum indicator to track trends or trend reversals.

The extremely versatile momentum indicator makes it easy for traders to create short-term and long-term momentum trading systems.

The scalability of the momentum indicator makes it a valuable trading tool for any trader.

If you want to try the Momentum indicator, use our demo account. Demo accounts allow traders to trade in a risk-free environment with a virtual account until the trader is ready to trade in the real market. It’s great isn’t it! So what are you waiting for without creating a demo account today!

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