The Momentum Indicator is a powerful tool that measures how much a security's price has changed over a set period. If you're looking to sharpen your trading strategy, here are two primary ways to leverage the Momentum indicator:
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Trend-Following Oscillator: You can use the Momentum indicator much like you would the Moving Average Convergence/Divergence (MACD). The idea is straightforward: buy when the indicator hits a low and starts to climb, and sell when it peaks and begins to fall. To get a better handle on when the indicator is bottoming or peaking, consider plotting a short-term moving average.
When the Momentum indicator reaches extreme high or low values compared to its historical range, it's often a sign that the current trend will continue. For instance, if the indicator hits a high point and then starts to decline, it suggests that prices could still rise further. Just remember to wait for price action to confirm the signal generated by the indicator before making your move (for example, if prices peak and start to drop, wait for confirmation before selling).
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Leading Indicator: Alternatively, the Momentum indicator can serve as a leading indicator. This method operates on the premise that market tops are often marked by rapid price increases (when everyone is optimistic), while market bottoms are characterized by sharp price declines (when traders are eager to exit). While this approach holds true in many situations, it's worth noting that it's a generalization.
As the market peaks, you'll notice the Momentum indicator rising sharply, only to then decline — diverging from the price's continued upward or sideways trend. Conversely, at a market bottom, the Momentum will drop quickly before it starts to rise, often ahead of price movements. These scenarios lead to divergences between the indicator and actual prices.
Calculation
The Momentum is calculated by comparing today’s price to the price from several periods ago:
MOMENTUM = CLOSE(i)/CLOSE(i-N)*100
Where:
- CLOSE(i): The closing price of the current period;
- CLOSE(i-N): The closing price from N periods ago.
For a deeper dive into the Momentum Indicator, check out the full description on MetaTrader 5.
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