The momentum indicator is one of the simplest and most understandable oscillators and comes standard on most trading platforms. It is often used for a general, superficial assessment of price action over a long period and for forecasting. Although momentum cannot be called ideal, it is often used in simple, intraday strategies to confirm signals. In this review, you will get acquainted with the principle of calculating the oscillator and its modifications, with advantages and disadvantages, and learn to recognize its signals and apply the tool in practice.
Start trading Forex right now with eToro!The momentum indicator is a simple leading oscillator that characterizes the change in the price of an asset over a fixed time period. French mathematician Paul Emile Appel who worked on mathematical analysis, theories of geometry, and mechanics is considered to be the author of this indicator. Momentum received recognition and became popular thanks to the trader Martin Pring, who was also involved in the development of technical analysis patterns.
Try Momentum Indicator NowMomentum advantages:
Clear logic of calculation. The indicator analyzes the ratio of the price of the current candle in relation to the similar price of the candle for n-periods. The price type is specified in the settings.
Open-source. You can refine the indicator for your trading system.
Clear interpretation of signals. If the indicator values are growing and the indicator has passed a certain median line, there is an uptrend. The median line is determined by approximation, the horizontal level is fixed in the settings.
The absence of fixed levels is an advantage and a disadvantage at the same time. If the stochastic indicator has clearly defined the 80/20 overbought/oversold zones, then the momentum indicator will not have them. To draw them, you need to zoom out and visually determine which line the oscillator is moving relative to.
Advantages of momentum signals:
Unstable results. If there is a sharp local price surge relative to the prices of previous periods, the momentum tool will immediately react to it. Partially, this “disease” is treated in two ways: setting a higher period and increasing timeframes. A higher period allows you to smooth out the indicator line, making it smoother and therefore allow it to more accurately reflect the real market situation in relation to the historical period. Recommended timeframes are from M30.
The need for constant optimization. If the volatility has sharply increased, you need to revise the value of the period downward so that the indicator compares the genuine latest prices. If the price has moved to another price range, you need to change the values of the median level and the levels of the overbought/oversold zones.
Regarding the settings of levels and periods, the indicator allows complete freedom of action. There is no rigid algorithm and everyone can adjust the chart to fit their trading system. Beginners may find this difficult.
Description of the momentum indicator. The indicator compares the current price with the price that was a few candles ago. The calculation formula is as follows:
Momentum = Close(i)/Close(i-n) * 100%
Close(i) is the closing price of the current candle.
Close(i-n) is the closing price n candles ago.
The oscillator is placed under the price chart and is a single solid line.
In the description of the momentum indicator, most often in the settings, the level of 100% is indicated as the median line, which means that the current price is equal to the price that was n-candles ago. This level is called the zero mark. This is not entirely correct, because depending on the period, this “zero level” will be located on different horizontal lines.
Interpretation of indicator signals:
Indicator reversal at the highest extremes. The signal to open a short position is formed at the time of the formation of the highest top, while the long position is formed at the lowest point.
To search for a strong extremum, you need to plot the level of the previous highs/lows on the chart.
Interpretation of indicator signals
This graphic shows that the indicator most often reversed at the level of 100.52. A breakdown at this level is a preliminary signal. When the indicator reverses, open a short position.
This approach reduces the number of signals but makes them more accurate. In theory, you can target any highs and lows above or below the median level. But such a strategy gives a lot of false signals and does not allow you to estimate the duration of the reversal movement. In the proposed system, weak signals are eliminated and the transaction is opened in the direction of a strong reversal movement.
Divergence. Momentum is a leading indicator. If the chart shows a diversified movement of the price and the indicator, this indicates that the momentum is ahead of the price and the price will turn towards the indicator in a few candles.
Bullish divergence is built on the lows. The lows of the indicator are rising, and prices are falling. Bearish divergence is built on the highs. The highs of the indicator are falling while prices are rising.
An example of a bullish divergence.
An example of a bullish divergence
The divergence is clearly visible on the reduced scale of the chart. The lows of the indicator rise, but the price goes down. After the end of the divergence, a strong uptrend began.
Breakout of the median level “100”. According to the theory, the base level relative to which the momentum moves is the “100” mark. If the indicator started its upward movement from the bottom of the chart, crossed level 100, and continued to move, this is a signal to open a long position. If the momentum gauge stays above 100 for a long time, an upward movement dominates the market.
Breakout of the median level "100"
The mark “100” is the base level that is needed to understand the principle of searching for momentum signals. You don’t have to link to it. You can set any level that you wish.
Based on the basic idea of calculating the strength of the price impulse, modified versions of momentum have been developed:
Anchored moments. The formula has been changed to add the key static level “0”, which is the median.
Fx momentum. Standard momentum, which is displayed below the price chart in several windows corresponding to several major timeframes. The indicator is suitable for traders who analyze older time intervals and open a transaction on younger ones (for example, the Elder’s Three Screens strategy).
Momentum pinball. Standard momentum with visualization added. The indicator itself highlights key lows and highs with color, marking potential reversal points. There is no need to build additional horizontal levels.
Momentum divergence mtf. The indicator finds obvious discrepancies between the price and the line, marks them on the chart, and indicates the direction of opening transactions. There is a multi-timeframe function that displays several intervals in several windows on one chart.
There are also modified versions of the indicator built on a combination of momentum with MACD, RSI, and other oscillators.
The settings of the momentum indicator are so simple that they are practically absent. The calculation formula is embedded in the code and the trader only needs to select the period in accordance with the volatility of the asset, the timeframe, and the goals of the trading system.
Settings for the momentum indicator
The settings window has three tabs:
Parameters. Tab settings:
Period - The number of candles involved in the calculation. The longer the period, the slower the indicator reacts to price changes and the smoother the line becomes. The shorter the period, the more the indicator drops.
Apply to - The type of price that is used in the calculations. For example, the closing or opening price of a candle, the arithmetic average between the maximum and minimum prices of a candle, etc.
Lock — the width of the trading channel.
Levels. By default, the indicator levels are not set. But for the convenience of visually searching for indicator resistance/support levels or identifying key zones, you can set levels. They will appear as a horizontal line on the chart. You can set any number of levels, thereby forming the indicator movement ranges in different market situations.
Resistance and support levels
For example, a breakdown of a given level can be regarded as a signal to open a trade. This level, with a reduced scaling, is built according to the local minima of the first half of the chart. An increase in the amplitude of the indicator movement in its second half indicates the emergence of strong short-term trends.
Display. Here one or more timeframes are set on which the indicator is displayed. For example, if only the M30 interval is enabled, then when switching to another interval, the momentum will be removed from the chart.
The indicator source is open. You can make changes to it, and turn it into your unique modified version. If you know the source, use the built-in MetaEditor in MT4. If you don’t know the source, order the development of the indicator according to your own algorithm from programmers in the freelance section of the MQL5 analytical portal.
This block discusses several basic strategies that show how the momentum indicator works. They can be corrected, supplemented, adjusted to a specific asset, or built into a full-fledged trading system.
The strategy with the momentum indicator is based on the Keltner Channel, which differs from the Bollinger Bands since it follows the price more slowly and therefore allows you to see strong impulse movements. But the price most often tends to return to the average price range. The moment of reversal is a signal to open a transaction. Momentum confirms the signal.
Input data:
Asset - Any “major” currency pairs.
Timeframe - H4. The goal is to catch a movement 3-4 candles long, so it is better to take a timeframe from H4 and higher.
Settings: momentum (21), Keltner Channel (10, 0, 5).
Conditions for opening a long position:
The candle breaks up the border of the channel and closes outside it. Amplifying the signal factor outside the channel, there is more than 50% of the body of the candle.
Momentum is at its extreme and is starting to reverse.
The transaction is opened on the next candle in the direction of the reversal. Stop-loss may come into play, depending on the risk management system. Take profit is the average length of the last three candles. At the take profit level, you can close 50% of the transaction manually, and insure the remaining 50% with a trailing stop at the breakeven level. For a short position, the conditions are mirrored.
Example:
Condition for opening positions according to the strategy
The first three situations show signals to open a short position. In the fourth case, you can see a long position opening. Despite the relatively small reversal price movement, all the signals were effective.
This is not so much a strategy as a basic idea that can be used to build a trading system. The main indicator is an EMA trend tool with a period of 21 (exponential moving average). Momentum confirms the signal.
Conditions for opening a long position:
The price crosses the EMA from the bottom up.
Momentum crosses the 100% mark from the bottom up.
The ideal signal would be when momentum had hit a low, reversed, and crossed the 100% level on an upward move. The strategy allows you to catch strong long movements because it belongs to the long-term ones and works well on small intervals such as M30-H1.
Example:
Condition for opening positions according to the strategy
Working signals are marked with yellow rectangles, false ones are marked with red rectangles. This example shows how important momentum movement from its extreme is. In the first case, the signal is weak, since the downward movement began below the overbought zone. The second signal, which turned out to be false, is ignored because momentum “lingered” at the level of 100%. The third signal is strong because momentum reached the oversold zone and crossed the 100% mark on the upward movement.
Momentum is a good auxiliary indicator that goes well with patterns and trend indicators. Here are the options for using it:
Preliminary market analysis. Zoom out and see where the indicator is in relation to its median and in what direction is the current movement. Pay attention to the number of extrema, and their sharpness or smoothness. If momentum is at the bottom, has drawn an extreme point, and goes up, you can consider opening a long position.
Confirmation of a signal about the beginning of a trend. The indicator is used with such trend indicators as moving averages, Ichimoku, MACD oscillators, ADX, etc.
Search for trend reversal points and determination of transaction closing levels. The signal is when the indicator reaches its overbought/oversold zones. The indicator confirms reversal patterns well.
There are no perfect indicators. Therefore, it cannot be said that the momentum indicator is better or worse than other oscillators. It is just another technical analysis tool for price prediction. How to use the momentum indicator, how convenient it is for you, and how it fits your trading system is what’s important. You can only learn by testing it in practice, for example, on a demo or cent account.
The main signals of the indicator are similar to the signals inherent in most oscillators. The indicator shows overbought/oversold zones. On a reversal at the high/low, a trade is opened in the direction of a reversal (a variant of an aggressive strategy). Another signal is the crossing of the “100” level (a variant of a conservative strategy). The strongest signal is considered to be a divergence — a divergence of the directions of movement of the oscillator and the price. The presence of divergence indicates that the price will soon turn in the direction of the trend.
Momentum is used in intraday, medium, and long-term strategies as a signal-confirming tool. The indicator works best on timeframes from M30, trend strategies, and swing trading. It is not applicable on short timeframes, in scalping. Signals that are generated by the indicator at the time of news release in accordance with the economic calendar should be ignored. Also, the indicator is not used during the flat.
Momentum contains a simple averaging formula, so it cannot give absolutely accurate signals. It practically does not take into account fundamental factors, its values are affected by price noise. Therefore, momentum is used only as an additional, auxiliary tool that confirms the signals of the main indicators. It is combined with trend indicators and other oscillators. You can use modified versions.
Momentum has two main settings:
Period. This is the value of the candle that is used in the calculation formula relative to the current candle. By default, the period is set to 14, in some sources for intraday trading it is recommended to use the value 21.
Level. One or more horizontal lines denoting key levels or overbought/oversold zones. It is installed upon request.
There are no set recommendations. The indicator parameters are selected in accordance with the current market situation and asset volatility. The indicator is tested on a demo account or run through the MT4/MT5 tester.
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