Momentum in English it means "momentum", in forex it is defined as "momentum or momentum". One of the important factors in forex investment is the idea of a trend. Determining which market is in a trend (up or down), that trend has just started or has started and is ongoing or about to end and is about to move into a new trend, which is extremely informative. useful period that investors can use to enter / exit the market in the most reasonable way. The strength or force of that trend is Momentum (momentum).
This article will cover the Momentum indicator, a set indicator in MT4 trading software. We will learn what this indicator is. This indicator provides what signals and how to apply it in forex trading.
Overview of Momentum indicator
Momentum indicators reflect trends and evaluate the rate of change of prices over a specified period of time based on a comparison of current and past values. Specifically, the Momentum indicator measures the percentage increase or decrease in price over a given period of time.
Momentum = (Closei / Closeprint ) x 100
Of which: Closei It is the closing price at the i (and candle) session and Closeprint is the i-n closing price (or candle)
Where n is the time period (number of periods) determined by each investor, based on specific strategies. In MT4 software, the default value of n is 14
In the calculation, there are also cases where people calculate the value of Momentum in a simpler way, which is Momentum = Close.i - Closeprint , with this calculation, the Momentum indicator only reflects the change in the magnitude of the price, while the first calculation, the Momentum indicator more clearly reflects the rate of change of the price, expressed in%, near with the nature of more momentum. In MT4 software, the Momentum indicator is calculated by default in the first way.
Characteristics of Momentum indicator
- Momentum indicators can be used at any time frame
- Momentum line fluctuates around the 100 line. The farther the Momentum line is from the 100 road, the stronger the price movement.
- For example, you are setting the Momentum indicator with n = 14 on the H1 time frame. Momentum = 100 (Momentum line crosses 100) means that the closing price at the time of review is equal to the previous closing price of 14 hours. Momentum> 100 (Momentum line above 100) means that the closing price at the time of review is higher than the previous closing price of 14 hours. Similar to Momentum <100.
- The distance of the Momentum line to the 100 line shows how fast the price is moving. Momentum = 98%, the price is falling with stronger force than Momentum = 99%. Similarly, Momentum = 110%, the price is increasing with stronger force than Momentum = 105%.
Application of Momentum indicator
Momentum indicator helps identify the power behind each trend. Investors rely on this indicator to determine whether the market continues the direction of the main trend or that trend is losing momentum and starting to reverse. This indicator provides investors with 3 types of signals
- Signal when Momentum line crosses 100
- Signals when the Momentum line crosses the moving average
- The divergence / convergence signal between the price line and Momentum indicator.
How to trade with Momentum indicator
Signal crosses the 100 line
The price on the forex market is always volatile, so most of the time trading on the market, Momentum is always above or below the 100 line. At times when Momentum crosses 100, the market often buy or sell signals, but these are not strong signals.
When Momentum crosses the 100 line from the bottom up, this shows that the investors in the Long position (Buy) are dominating, the possibility of the price will continue to rise and this is a signal for you to enter the Buy order. Conversely, when Momentum crosses the 100 line from above, the short side (Dominance) is predominant, the possibility of price will continue to decline, you use this signal to enter the Sell order.
In practice, the Momentum is often used to cross the 100 line, with each such price at least an increase or decrease will occur, but these ups and downs are very short, sometimes it's only simply a retest of a general trend, if used improperly, you will easily place orders that go against that general trend.
To use this signal more appropriately, you use it when determining the price is moving in a general trend, then find the intersection point to enter the best order.
The current general trend in the picture above is an uptrend, you can wait for a decline as a retest before the price continues to follow the previous general trend. The sign is that the Momentum is falling to the 100 line, then rising again. At the Buy order at the moment Momentum crosses the 100 line from the bottom, you can confirm that signal with at least 3 candles increasing continuously after the retest of the price decrease. Stop-loss at the nearest previous bottom. Take-profit so that profit is 2 times higher than stop-loss.
However, as mentioned earlier, Momentum often intersects with the 100 line, the signals received are quite weak, so when using Momentum, you should combine with some other technical indicators.
The signal is crossing the moving average MA
In technical analysis with Momentum indicators, experts often combine the Momentum line with the moving average MA to find points at which prices are likely to reverse, starting a new trend. You can set an MA with arbitrary number of periods, but usually 9, 14 or 21 periods. The longer the number of periods, the higher the smoothness, but the received signal is often delayed compared to the price movement.
The basic idea of this signal is to enter Buy when Momentum cut MA from below and enter Sell when Momentum cut MA from above. However, this signal is still very rough as the signal intersects the 100 line. To be more effective, you only use this signal for transactions in the direction of the previous general trend (as in the case of analysis. signals cross the line 100 above) or only receive signals when Momentum falls into the area of overbought (oversold) or oversold (oversold).
On the Momentum indicator, to know if the price has entered the overbought or oversold zone, you can rely on the distance of Momentum with the 100 line. Overbought or oversold and the possibility of downward / upside adjustment occur, a new trend is about to begin. Or to be more certain, you can combine with the RSI indicator to identify the overbought or oversold areas of the price.
In the picture above, the oversold signal of the RSI appeared first, indicating the possibility that the market will correct again. At this point, you wait for Momentum signal to cut MA from below to enter Buy order. Stop-loss at the nearest previous bottom and take-profit so that the profit is at least 2 times higher than the stop-loss.
The divergence or convergence signal between Momentum and price line
- Convergence occurs when the price of creating a lower bottom is lower than the previous bottom but Momentum creates a lower bottom higher than the previous bottom.
- Divergence occurs when the price of creating a higher peak is higher than the previous peak but Momentum creates a lower peak lower than the previous peak.
Before the divergence of price and Momentum, the market was in an uptrend. After divergence appeared, prices reversed, starting a new trend, moving from up to down.
Similar to the case of convergence between price and Momentum indicator.
However, the price reversal signal when a combination or divergence as above is a weak signal, especially if the price is in a strong trend, these signals are often wrong. The analysis of price reversals based on these signals is only the most basic analysis, so you should not use this signal independently but must incorporate additional methods or indicators. Other technical papers.
The figure below is the case that the price is in a strong downtrend, the convergence signals between the price and Momentum are all wrong.
How to set the Momentum indicator in MT4 software
To open Momentum indicator in MT4 software, follow the steps below
At the Menu bar, select Insert ah Indicators ah Oscillators ah Momentum as shown below.
The Momentum indicator settings dialog box appears as follows
Here, you in turn set the parameters in the tabs Parameters, Level and Visualization
- Parameters: at the box Period, 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 price closed. Then choose the color and style for Momentum
- Level: at this tab, you have to set the line 100 (MT4 will not be made available) by clicking the button Add, enter the number 100, then select the color and style for this line
- Visualization: If you want this indicator to display on any time frame, click on that time frame.
At each tab, when the installation is completed, click OK, got it to complete.
Create the moving average MA on the chart of the Momentum indicator
Section Navigator, you choose the indicator Moving Average in the group of trend indicators Trend, then hold the mouse at this indicator and then drag and drop it into the graph pane of the Momentum indicator created earlier. The MA setup dialog box appears as below
You make the same settings as the Momentum indicator, but in the box Period, enter the number of periods for the average, the default is 21, you can use this value or change if desired. At the box MA method, choose the simple moving average method (Simple), in the box Apply to, to choose First Indicator’s Data to insert MA into Momentum indicator.
Momentum indicators are widely used to analyze the momentum of a trend. However, any one indicator has its disadvantages. Therefore, you need to practice a lot to draw your own experiences from which to apply better. At the same time, as stated, Momentum is not a strong indicator to be able to use it independently but must be combined with other methods and technical indicators.
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Author: Tin Nguyen
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