In forex education, the momentum indicator is considered extremely important and useful. In this article, we will examine all the possibilities who offers in forex trading and how we should use it.
The momentum indicator, according to forex education is an oscillator. His line moves above or below "100". When indicators line reaches maximum or minimum values, the price is in overbought or oversold condition.
Traders use the indicator in order to identify overbought and oversold conditions and the power of the trend. Momentum indicator can show the trend direction and at the same time can compare the current price from the past prices. In this way can measure how quickly the price is changing.
Momentum Indicator Formula Calculation
The calculation formula is very simple.
First of all, I must mention that his regular parameter is "14" time periods.
Therefore, the formula is 100 x (closing price for the current bar / closing price “14” bars ago).
Always remember that if we change the normal setting in a smaller number of time periods, then we will make the indicator enough more sensitive, but we will increase the risk for false trading signals.
From all the above is concluded that when the current price is higher than the price in the past, then the Momentum indicator is positive and when the current price is lower than the price in the past, then the Momentum indicator is negative.
Buy and Sell Signals
In forex education, the Momentum indicator is considered as a leading indicator because his forex trading signals predict that is coming to a change in the trend. Many traders prefer to attach a Smoothed Moving Average on Momentum indicators line in order to confirm that the forex trading signal from the indicator is valid.
A buy trading signal is created when the indicator crosses 100 level from below during an uptrend. When happens something like this must consider as a bullish signal.
A sell trading signal is created when the indicator crosses 100 level from above during a downtrend. When happens something like this must consider as a bearish signal.
If the indicator is around to 100 level, it means that probably we are in a sideways market.
Momentum Divergences
In forex technical analysis is very important when appears divergence between an indicator and current price level. This divergence is an early warning of a possible reverse.
In forex education, we have determined that a positive divergence occurs when the Momentum indicator reaches a higher bottom than the bottom of the price and a negative divergence occurs when the Momentum indicator reaches a lower top than the top of the price.
In conclusion, we have to say that Momentum indicator is excellent because can give us very early valuable information for a future price movement. Always remember that an unbreakable rule in forex education is to do not use Momentum indicator alone but with other indicators for more accurate forex trading signals.
No comments:
Post a Comment