Momentum in English means “momentum“, in forex we understand it as the power of trends. One of the important factors in forex investing is the idea of trends. Determining which trend the market is in (up or down), whether that trend has just begun or has started and is continuing or is about to end and is about to move to a new trend, is extremely important information. useful period that investors can use to enter/exit the market most reasonably. The strength or force of that trend is Momentum.
This article will cover the Macd momentum indicator, a pre-set indicator in the MT4 trading software. Join Learn Forex Trading to find out what this indicator is. What signals does this indicator provide and how can it be in forex trading?
Overview of the Momentum indicator
The Momentum indicator reflects the trend and evaluates the rate of change in price over a specified time based on a comparison of current and past values. Specifically, the Momentum indicator measures the percentage increase or decrease in price over a certain time.
Momentum = (Closei / Closei-n ) x 100
In which: Close i is the closing price at the ith trading session (or candle) and Close i-n is the closing price at the ith trading session (or candle)
Where n is the time (number of periods) determined by each investor, based on specific strategies. In the MT4 software, the default n value is 14
In calculations, there are also cases where people calculate the value of momentum Macd more simply. That is MOM = Close i – Close i-n. With this calculation, it only reflects the change in price magnitude. As for the first calculation, it more clearly reflects the speed of price change. Expressed in %, closer to the nature of MOM. In the MT4 software, the Momentum indicator is calculated by default first.
See more: Grasp world oil prices to “master” transactions
Characteristics of Momentum indicator
- The Momentum indicator can be used at any timeframe
- The Momentum line fluctuates around the 100 line. The farther the line is from the 100 line, the stronger the price fluctuations are.
- For example, you are setting up the Macd MOM indicator with n = 14 on the H1 time frame. MOM = 100 (Momentum line crosses 100 lines) means that the closing price at the current time is equal to the closing price 14 hours earlier. MOM > 100 (Momentum line is above the 100 line) means that the closing price at the time being considered is higher than the closing price 14 hours earlier. Similar to MOM <100.
- The distance of the Momentum line from the 100 line indicates how fast the price is moving. MOM = 98%, the price is falling with stronger force than MOM = 99%. Similarly, MOM = 110% means the price is increasing with a stronger force than MOM = 105%.
Application of Momentum indicator
The Momentum indicator helps determine the strength behind each trend. Investors rely on this indicator to determine whether the market will continue the direction of the main trend. Or that trend is losing MOM and starting to reverse. This indicator provides investors with 3 types of signals
- Signal when the Momentum line crosses the 100 line
- Signal when the Momentum line crosses the moving average
- Divergence/convergence signal between price line and Momentum indicator.
How to trade with a Momentum indicator
How to trade with this MOM indicator? Let’s see the suggestions below.
Signal intersection with line 100
Prices in the forex market always fluctuate. That’s why most of the time transactions take place on the market. Momentum is always above or below the 100 line. At times when MOM Macd crosses the 100 line, the market often shows buy or sell signals. But these are not strong signals.
When Momentum crosses the 100 line from the bottom up. This shows that investors in Long (Buy) positions are dominant. The price will likely continue to increase and this is a signal for you to enter a Buy order. On the contrary, when Momentum crosses the 100 line from above. The sellers (Short) are dominant, the price will likely continue to decrease. You use this signal to enter a Sell order
How to use signals properly
To use this signal more reasonably. Please use it when you determine that the price is moving in a general trend. Then find the intersection points to enter the best orders.
However, as mentioned earlier, MOM Macd often intersects the 100 lines, and the signals received are quite weak. Therefore, when using this indicator, you should combine it with some other technical indicators.
Signal crossover with moving average MA
In technical analysis with Momentum indicator. Experts often combine the Momentum line with the moving average line to find the points at which the price is likely to reverse, starting a new trend. You can set the MA line with an arbitrary number of periods. But usually 9, 14, or 21 periods. The longer the number of periods, the higher the smoothness. However, the received signal is often delayed compared to price fluctuations.
How to know if the price has entered the overbought or oversold zone
On the indicator, to identify whether the price has entered the overbought or oversold zone. You can rely on the distance of MACD MOM from the 100 lines. When the distance is quite far, it can be determined that the price is falling into an overbought situation. Or oversold and a downward/upward correction is likely to occur, a new trend is about to begin. Or to be more certain, you can combine it with the RSI indicator. To identify overbought or oversold areas of the price.
In the image above, the oversold signal of the RSI indicator appeared first. Shows the possibility that the market will adjust upward again. At this time, you wait for the Momentum signal to cut the MA from below to enter a Buy order. Stop-loss at the nearest previous low and take-profit so that the profit is at least 2 times higher than the stop-loss.
Divergence or convergence signal between Momentum line and price line
- Convergence occurs when the price creates a lower bottom than the previous one, but this indicator creates a higher bottom than the previous one.
- Divergence occurs when the price creates a higher peak than the previous peak, but this indicator creates a lower peak than the previous peak.
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Signals diverge or converge
However, the price reversal signal when convergence or divergence appears as above is weak. Especially if the price is in a strong trend, these signals are often wrong. Analyzing price reversals based on these signals is just the most basic analysis. Therefore, you should not use this signal independently. But it must be combined with other technical methods or indicators.
The picture below is a case where the price is in a strong downtrend. Convergence signals between price and Momentum are all wrong.
See more: Registering XM broker account on the phone
How to set up Momentum indicator in MT4 software
To open this indicator in MT4 software, please follow the instructions below:
In the Menu bar, select Insert > Indicators > Oscillators > Momentum as shown below.
- Parameters: at cell Period, you enter the number of periods, MT4 will default to 14, in the box Apply to, you choose the price type, here we will leave the closing price. Then choose the color and style for the MOM MACD line.
- Level: In this tab, you must set up line 100 (MT4 will not create it) by clicking the button Add, enter the number 100, and then choose the color and style for this line.
- Visualization: If you want this indicator to display in any time frame, click on that time frame.
At each tab, when installation is complete, click OK to complete.
Create a moving average MA on the indicator’s graph:
Section Navigator, you choose the indicator Moving Average in the group of trend indicators Trend, then hold the mouse on this indicator and drag and drop it into the chart frame of the Momentum indicator created earlier. The MA settings dialog box appears below
Conclude
The Momentum indicator is widely used to analyze trend MOM. However, any indicator has its disadvantages. Therefore, you need to practice a lot to gain your own experience and then apply it better. At the same time, as Learn Forex Trading said, Momentum is not a strong indicator so it can be used independently but needs to be combined with other technical methods and indicators.
