Momentum indicator, A pleasant reading Momentum Indicator – an effective and simple tempo indicator that generates leading signals about changes in the character of price movement. Many classify it as an oscillator, although in the classic sense it is not. It is the most effective for long-term trading, while it can be used on short timeframes. Download Momentum Indicator, It is not known for sure, to whom the authorship of creation of this tool belongs. The most popular promoter of Momentum is the well-known trader Martin Pring.
Before reading the article and writing your questions in the comments section, I recommend to watch this video. It’s not long but covers the biggest part of questions on the topic.
Table of Contents
Description of the Momentum indicator
The indicator is a curve, the fluctuations of which are ahead of the changes in the price chart. Thus, focusing on Momentum, we can assume what will be the subsequent price movement, and it is possible to respond to its turn in time. The effectiveness of the tool increases significantly if you use it in combination with the moving average. There are several formulas for calculating this indicator. For example, John Murphy advises considering it as a difference in the closing prices of the current and past (a certain number of bars back) periods.
Stephen Akelis proposes to measure the ratio of these indicators. Of course, ordinary users do not need to think much about what formula to choose. The indicator is present in most terminals, so it will be sufficient to simply set several parameters, and the calculation will occur automatically. If the base trading platform package does not contain Momentum, it can always be installed quickly by downloading from our server below.
Momentum indicator settings
In the window on the left we can set the following parameters:
- “Period” is the number of bars that will be taken into account when creating a curve.
- “Apply to” – the price, based on which the indicator is built.
- “Lock the minimum/maximum” – the width of the trading range.
You can also set resistance/support levels, change the appearance of the line, and so on. The optimal period for this indicator is 14. If the trading system used by a trader is aggressive enough, the indicator can be reduced to receive signals more often. It should be borne in mind that many of them will be false. Increasing the period, on the contrary, reduces the frequency of messages, but improves their quality. The curve is usually based on the closing price indications. The range in which it moves traditionally forms the levels -100 and +100.
Trading with the Momentum indicator
Momentum can be used both as an oscillator and as a trend indicator. In the first case, the signal for buying becomes the beginning of growth after a significant fall. Accordingly, the sale is carried out after the curve turns down after a long climb.
Based on the characteristics of the asset and their own experience, everyone determines for themselves, what exactly a significant amount should be, from the return of which the beginning of a new trend can be considered. There is no universal recipe here. Overbought/overbought levels can be set in the parameters.
If Momentum acts as a trend indicator, the signal is the intersection of the zero line. The fall from above indicates the possibility of a long trade, the rise from below indicates the possibility for a short trade. Also with the help of the indicator it is possible to detect divergences – inconsistencies in the behavior of charts.
If in the presence of an upward trend, the price updates the next maximum, and the corresponding Momentum extremum decreases slightly, it can be assumed that the time of change is coming, and a reversal will happen soon. In this case, it is better to get rid of the asset. If the downward trend does not confirm the price minimum, it is worthwhile to proceed with the short trade.
Momentum and MA
As has already been mentioned above, trading via Momentum becomes more effective when used in conjunction with the Moving Average. This system has proved itself on most standard timeframes. The period of the exponential average corresponds to a similar indicator of the indicator. For the formation of a signal, two conditions must be met: Pass the Momentum curve through the zero level and intersect the EMA with the price. If in both cases, the cross has passed from the top, a position for long trade opens, if from below, a position for short opens:
On the chart, we see that the price crossed the EMA from below, and the indicator just overcame the zero mark. This means that the time for long trade has come. When Momentum is reduced to zero, it is necessary to be ready to fix profit. It should be noted that within the framework of this strategy, in the presence of a strong trend, many signals need to be treated with increased “suspicion”.
For additional filtering, it is worth using the readings on a larger timeframe. If the “senior” trading period demonstrates an obvious upward trend, then signals for short trades should be ignored. With a downward trend, calls for log trades are skipped. Indeed, some of them may turn out to be true, and thus profit will be lost, but ultimately the trader should be in the black.
As with any other indicator, Momentum is not free from shortcomings.
The main one is an instant response to the input of new data if it differs significantly from the general group. The curve fluctuates too sharply when it comes out of the calculation.
When working on short timeframes, the results can be very unstable. Experts do not recommend using the indicator as the main tool.
Many traders adhere to the view that the main purpose of Momentum is to perform auxiliary functions when working with other technical programs. We can agree with this, but there are also opposite points of view. Everyone decides for themselves how to operate the indicator. In any case, it is necessary to note the very valuable ability of the instrument to anticipate the subsequent movement of the market. An additional advantage is that the interpretation of the signals generated by Momentum will not be a problem even for beginners.