The Momentum Indicator is an indicator that calculates the value price shifts during a specific period of time, often defined as “X” candles. One of the things that make it a little unusual, Momentum is used as a Leading Indicator. This tool takes into the account that the price will absolutely increase towards the end of an uptrend because everyone is “sure” price will continue to increase. This is often a warning in the markets, and is quite common as people get “too bullish”, or in the opposite situation, “too bearish”.

Just like the MACD Indicator, Momentum is used as an oscillator following the tendency of the general health of the markets. In this situation, if the indicator makes a new low and begins to rise, a buy signal is being transmitted. If the indicator comes up makes a new high only to turn downwards, the signal to sell is shown.

The Momentum indicator calculates the pair's rate of change, which is what makes it a leading indicator. The Momentum indicator forms an oscillator that rises above and falls below the 100 level. Buy and sell signals can be found by centerline crossovers and divergence.

When the signal line crosses over the 100 mark, it is signaling that the momentum is turning upward, and that a buy position is recommended. The opposite is true if the line crosses below the 100 line. This shows momentum is shifting towards the downside.

To use the indicator for divergence, it should be noted that if momentum isn’t in synch with price action, it often shows a lack of underlying strength. The price reaching a new high, but the Momentum indicator failing to do so can show that there isn’t suitable strength to carry on the buying tone that the market finds itself in at the moment. This can often be the first sign that something is wrong, and an imminent change of direction is about to happen.

Published on 17th of June 2011
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