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Business / Finance

Momentum indicator — what you need to know

Portal Forex trader 01.02.2019 at 11:17

Forex trading strategies, expert advisors, indicators, video training trade

Among all the indicators used for technical analysis of the market, Momentum is simultaneously one of the most popular and simple. It shows the average rate of price change over selected period of time. At its core, Momentum is the leading indicator in relation to the current movement of the market. This means that the price chart can still grow, but the tool will have to "draw" the top and start falling only after which will follow the changes of quotations in the downward direction. Today we talk about the Momentum indicator, custom trading strategies on it and important nuances.

the Characteristics of the indicator

Platform: Any

Currency pairs: any

Timeframe: any

trading Time: around the clock

Recommended brokers: Alpari, RoboForex, InstaForex

What is this indicator?

This indicator was created by talented French mathematician Paul émile Appel, being the father of many ingenious technical devices, and authored hundreds of books and articles on analysis, geometry and mechanics.

Appel was born on 27 September 1855 in Strasbourg. In 1873 he entered the Higher normal school in Paris. In 1876 he received the degree of doctor of mathematics with a thesis. In 1885 he received a professorship at the chair of rational mechanics at the University of Paris. In 1892 he was elected member of the French Academy of Sciences. In 1911 he became a corresponding member of the Petersburg Academy of Sciences, in 1925 was elected a foreign honorary member of the Russian Academy of Sciences. By the way, in honor of the Appel named the asteroid Appella opened in 1922.

the Momentum Indicator is probably the most simple and straightforward of all trend indicators. To find out whether the child is growing fast enough, you can measure his height each month and compare with six months ago. Then you'll learn: growing your child normally behind or so that we should take him to the doctor or is growing so rapidly that we need to think about the basketball coach. Momentum shows you: if the trend accelerates or decelerates, and may retain its speed.

When momentum makes a new high, this suggests that optimism of traders grows, and the rise will probably continue. When momentum falls to a new low, it shows the growing pessimism of the crowd and on the likelihood of the continuation of falling prices in the future.

When prices rise but momentum falls, it warns you that the top is near and it's time to profit from the held positions and tighten stops. When prices make a new high, and a maximum momentum below the previous, the divergence of the "bears" gives a strong signal to sell. The reverse is true in a downtrend.

is Sometimes used smoothed Momentum, which reduces the volatility due to the use of moving averages.

the Popularity indicator in the first place, due to its simplicity, versatility and the fact that he is one of the few leading indicators. Momentum does not just respond to the direction of movement of prices, but also changes the direction before it is done prices. As a rule, first takes place the reversal of the indicator with the continued growth in prices and then the trend reaches the peak and turns down. If the indicator begins to slowly fall, then reverses and starts up, soon the trend will also reach their minimum and turn around.

Here, however, it should be emphasized that all oscillatory methods designed to trade in the direction of the prevailing trend, which is more important than any signal. In conditions of pronounced bullish or bearish market you can use only those signals that call for buying or selling respectively.

Installation and settings

the Momentum Indicator shows the signal in the box beneath the image of the price chart. It is characterized by its simplicity, so when installing it does not require special skills. In most terminals, the indicator is built in. If you need an advanced version, for instance with Alpine, you can take us on the forum.

settings of the indicator only for the period of averaging. Also you can choose the price to calculate and set the levels. By default already exposed to the level of 100 – it serves as the zero line of the indicator Momentum.

the Ten-day period is a fairly common calculation period. However, for analysis you can take any period of time. When you shorten the period — say, up to five days, the sensitivity curve of the indicator increases, which leads to an increase in the frequency of its oscillation. Prolonged periods, such as twenty-day, — manifest in the form of much smoother curves with less pronounced frequency oscillations.

So, using the 10-day momentum we compare today's closing price ten days before. If today the closing price is higher, then the index will be positive. If the current closing price is below the price ten days ago, the value is negative. When using a momentum based on the fact that the price difference (difference between current closing price and the price some time ago) should steadily increase as development trends. In other words, the rate of change of prices increases. If prices are rising and the indicator is starting to flatten, it means the trend is slowing. This may be an early symptom of its end.

the Formula

Momentum (Momentum) is the most simple trend indicator. Its formula is so simple and intuitive that does not require description. The excess of current closing prices over the past shows up trend, and if current lower prices for your selected past time interval, it means a downtrend.

is Sometimes used smoothed momentum to reduce its volatility. For these purposes, use moving averages.

Classically, the value of the Momentum indicator is calculated as the difference between the levels of closing of the last and first bars on a particular interval. The length of the interval depends on the index of the indicator and in most cases is taken equal to 14. The formula is as follows:

M(j) = CLOSE(j) CLOSE(j – n),

where M(j) is the value of Momentum;

CLOSE(j) — close price of current bar;

CLOSE(j – n) — close price of the bar that appeared on the chart n timeframe ago.

the formula shows that the value of the indicator can be both positive and negative. And the more Momentum departs from zero, the more pronounced the market oversold or overbought. At the same time for different intervals and different currency pairs, the oscillation amplitude of the Momentum will be very different.

the Above formula is taken from the book of John John. Murphy's "Technical analysis of the futures markets" and is considered a classic formula for calculating the indicator.

However, there is another variation of the calculation of Momentum indicator based on the book by Stephen Achelis "Technical analysis from A to z," in which Momentum coincides with the Rate of Change and is defined as the ratio of current price to the price occurring n periods ago:

M(j) = CLOSE (j) * 100 / CLOSE (j – n)

In the trading terminal MT4 Momentum is calculated by the second equation, so it varies around zero, but around level 100.

this formula at the time moved many of the program of technical analysis but it is not accurate enough.

There is also a separate formula, called the Chande Momentum Oscillator (CMO). It is calculated as follows:

MomentumSimple = C — C-n,

where C is the closing price of the current period, and S-n is the closing price of x bars ago.

If MomentumSimple >0, then M1= MomentumSimple, and M2=0;

If MomentumSimple