Momentum
Last updated
Last updated
Momentum measures the rate of change in the closing prices for a currency pair, stock, or commodity. It is often used to identify the weakness or inner strength of a pair. It is important to note that it signals where potential reversal points are or when trends are about to start. Traders are always on the lookout for changes in momentum as this allows them to better predict volatility in the currency exchange market. The trend is strongest when there is a high momentum reading up or down. The momentum indicator is usually displayed as a single line, on its own chart, separate from the price bars.
Momentum Buy Signal
The Momentum indicator crosses above the zero line. Crossing the zero line implies that the price of the stock, future, or currency pair is reversing course, either by bottoming out or breaking above recent highs, which is a bullish signal.
Momentum Sell Signal
The Momentum indicator crosses below the zero line. Crossing the zero line can generally mean two things: a futures, currency pair, or stock price has peaked and reversed, or that the price has broken below recent lows, either way, a bearish signal.
Momentum Exit Signals
Generally speaking, the buy and sell signals discussed above are poor exits, whether selling long or buying to cover a short position. By the time the Momentum indicator returns back to the zero line, most or all of the profits are likely to have disappeared, or worse, the trader has allowed a winning position to turn into a losing one.
When the Momentum is reversing course and is heading back towards the zero line, it means that profits have been eroded. How much of a retracement back towards the zero line before the exit is triggered is up to the trader. Another option is to draw a trend line. When the trend line is broken, that could be an exit signal. Like most technical analysis indicators, interpreting them is part science and part art form.
The Momentum indicator compares the current price with the past price. How far in the past the comparison is made is up to the technical analysis trader. The calculation of Momentum is pretty simple:
Momentum = Close (i) – Close (i-N)
Where: Close (i) — closing price of the current bar; Close (i-N) — closing price of the bar N periods ago.
Period of momentum – allows setting the past period for which the data will be taken when plotting the indicator. The default value is 20.
The indicator itself looks as follows on the chart:
