Introduction to the Momentum Indicator
Momentum is one of the main signals that traders use when trying to identify potential trade signals. This is because price typically moves in continuation of the direction of momentum.
The Momentum Indicator is a tool which traders can use to identify the direction of the market’s momentum.
What is the Momentum Indicator?
The Momentum Indicator is an oscillator type of technical indicator which was developed to measure the momentum behind price movements.
It is a simple technical indicator which plots a line that oscillates around a midline which is 100.
A Momentum Indicator line that is above 100 indicates a bullish momentum, while a line that is below 100 indicates a bearish momentum.
How the Momentum Indicator Works?
The Momentum Indicator has a simple formula which it uses to plot its Momentum oscillator.
It takes the closing price of a price candle which is an “x” number of periods prior. It then divides the closing price of the current bar from that of the price bar which is “x” periods prior, then multiplies the result by 100.
This creates a line which would be above 100 if the current bar has a higher closing price than that of the prior bar, and below 100 if the current bar has a lower closing price than that of the prior bar.
How to use the Momentum Indicator for MT4
The Momentum Indicator has just one variable in its formula. This would be the “x” number of periods in which the prior closing price would be retrieved from.
The Momentum Indicator allows traders to modify this value on the “MomPeriod” variable within the indicator’s settings.
There are a few ways to use the Momentum Indicator.
Traders can observe trend bias on whether the Momentum Indicator line is generally positive or negative.
Traders can also use the crossing over of the Momentum Indicator line above or below 100 as a basis for a momentum reversal. However, this should be in confluence with price action or with the long-term trend.
Since it is also an oscillator type of indicator, it can also be used as a basis for identifying divergences.
Buy Trade Setup
When to Enter?
Identify an uptrend market, then wait for the Momentum line to drop below 100 on the pullback. Open a buy order as soon as the Momentum line crosses back above 100. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the Momentum line crosses below 100.
Sell Trade Setup
When to Enter?
Identify a downtrend market, then wait for the Momentum line to breach above 100 on the pullback. Open a sell order as soon as the Momentum line crosses back below 100. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the Momentum line crosses above 100.
Conclusion
The Momentum Indicator is a basic indicator that can also be very useful for retail traders. It does seem to produce an oscillator line which behaves erratically. This is because its formula has a more direct comparison to price movements. However, it can still be useful for identifying momentum reversals.
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