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The Momentum indicator is used in Forex trading
The Momentum indicator is a versatile algorithm which can be used not only to determine the prevailing trend, but to find the optimal point for transactions. In this review we describe the features of its calculation, and then turn our attention to the variants of interpretation of signals generated by the oscillator.
In translation from English "Momentum" means "moment, momentum, quantity of motion," therefore is the name of the indicator it becomes clear that it measures the force and duration of price momentum.
Today it is difficult to say who first thought to use this tool, as it is mentioned in almost all the famous classics of technical analysis, including Stephen Alexis, John Murphy, and Linda Raschke. In any case, the history of its appearance plays no role, it is interesting here more – each of these authors calculates the Momentum indicator for different formulas.
How to FOREX Momentum indicator is calculated
In the classic version, built into a stock exchange the terminals, the value of the indicator "time" is equal to the difference between the current price and the price recorded a few periods ago. In fact, the Momentum indicator shows the amount of the financial result in points that a trader might get if I bought or sold the asset N candles ago.
The traditional Momentum indicator
Another version of the calculation uses the ratio of the current price of the asset to its historical value. This logic is just used in the standard Momentum, which is installed by default in the trading terminal MetaTrader 4 is popular among Forex traders.
The light in the basement graphics
Which option to apply to trade – everyone decides for himself, the more the dynamics of the indicator in both cases, almost no difference, just for calculations used different values – in the first case is matched to the difference in the absolute value and the second relative. In order to verify this, the next chart I have compared the two versions of Momentum indicator.
Multiple versions of the Momentum in the Forex
There is also "normalized" option, which is calculated by multiplying by 100 the result of dividing the classical momentum on the price N candles ago. It turns out that it measures the returns from the asset, and the Forex applying this option is impractical, since such formulas are useful to investors and the currency market is mainly speculative.
An alternative option Momentum indicator for MetaTrader 4:
Signals Momentum indicator in Forex
As I said, with this tool you can analyze the trends, it is enough to remember this simple rule:
if the Momentum line is above 100 the trend is upward;
if the indicator is below the 100 – downtrend.
Indicator Momentum
Clearly, when mentioned level 100, we are talking about the version of the algorithm built into MetaTrader 4, if we apply the classical version of the Momentum indicator, the signal level is located at zero. Further, I will not go back to this question and all example, for version from Metaquotes.
Back to trends. The logic in this case is very simple – the growth of the indicator values shows that the price of the new candle is above historical prices, and the price increase is nothing more than a trend. Likewise, due to the bearish trend.
Optimizing the calculation period of the indicator, you can analyze trends at different time intervals, for example, the indicator based on the 20 candles on the daily chart shows the trend over the last month. If you choose a minute chart and set the period to 60 in the current time, the algorithm will evaluate the trend that has developed in the last hour.
And the second version of the Momentum indicator is in search of entry points, meaning it acts as a conventional oscillator, which generates the signals from the borders of overbought/oversold.
Operations using the algorithm of Momentum
The only problem here is lack of specific standards for the extreme boundaries, that is, they are not provided by default as stochastics or RSI, so every tool they have to mark themselves.
More experienced traders decide this drawback by building on the "momentum" of the dynamic envelope of the moving averages are parallel, for example:
Traded on Momentum
In this case, the boundaries of the overbought/oversold are being built in relation to the Momentum indicator, so they always take into account changes in volatility of the trading instrument.
Thus, for the Momentum indicator is characterized by the following strengths:
it works on the basic formula, and therefore do not "worry" terminal;
a simple algorithm of calculations does not create ambiguity in the search signals;
"momentum" can benefit both srednesrochnoi and scalpers;
the source code of this indicator by default a part of almost all MetaTrader 4 build, so it could conduct its own experiments.
As for specific shortcomings, I can name only one – is the lack of boundaries of the overbought/oversold in all other respects it is no worse than any other oscillator.
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| Category: Forex | Added by: (05.11.2017)
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| Views: 354
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