Among the most underestimated indicators offered by any trading platform is the Momentum indicator. Like the name suggests, it shows the “momentum” of a security/financial product, and this is extremely important in trading.
There is a saying every trader is familiar with; price action is the most important indicator. Therefore, to succeed, traders need to put in the screen time, to simply watch price action and see how price reacts at specific levels.
Support and resistance levels are easy to spot, but price action around them is the thing that really matters. There is no indicator out there that is more accurate in showing the price action and the power of a move than the Momentum indicator.
Where to Find It?
The Momentum indicator is an oscillator. Having said that, it means it appears on the bottom of the chart, in a separate window.
The MetaTrader platform is offering it on the oscillators list, and after selecting it, a popup window appears. The default period is the 14 period, and it means it considers the last fourteen candles before plotting a value on the screen.
By clicking ok, the oscillator appears on the screen. Before moving on, we must say that it travels around the 100 level. However, the level is not marked on the chart, we need to add it. To do that, simply go to the levels tab and add the 100 value as it appears in the image below.
By clicking OK, the Momentum indicator with the 100 level is plotted. The 100 level can be used as dividing the market in a bullish or bearish one.
How to Use It?
However, this indicator is not like any other. While it shows bullish and bearish conditions, the 100 level acts more like the “moment” a new push in the direction of the original trend should come.
For example, supposed there is a bearish trend. If the trend is strong, the Momentum indicator spends most of its time below the 100 level. If the trend is strong on the London and North American sessions, the Momentum will stay below the 100 level.
However, when the Asian session comes, volatility decreases. Therefore, price action slows down, and the Momentum indicator is slowly grinding back to 100 or a bit over 100. By the time the London session starts again, the first move should be lower.
Another great way to use it is to simply look for divergences between the oscillator and price. Traders should always stick with the oscillators for the simple reason that it considers more candles before plotting a value. In this case, fourteen candles are used before plotting the Momentum value.
Above there is the EURUSD daily chart with the Momentum indicator plotted below it. The moment the indicator diverged from the price (price is making two consecutive lows while the Momentum indicator is not confirming them), a bullish divergence appears.
The idea is to wait for the price to move above the 100 level, which confirms a change in bias from bearish to bullish, and then at the next move below the 100 level to go long. Traders should keep doing that every time Momentum dips below 100 and there is no bearish divergence in sight (meaning the price and the oscillator are doing the same moves).
While this seems like a simplistic approach, it is a powerful one because of the similarities between the oscillator and pure price action. The inability of the Momentum indicator to diverge from the actual price shows the previous trend was reversed and now bulls are in control.
Different levels can be used too. Adding the 110 and 90-period, results in having different levels that can act as overbought and oversold levels just like in the case of classical oscillators like the RSI (Relative Strength Index), Stochastics, and so on.
One of the biggest qualities of the Momentum indicator is that it isn’t repainting. Repainting refers to the values of the oscillator changing in time.
The fractal or the zigzag indicators repaint and therefore the back-testing of any strategy based on the two is not accurate. If an oscillator plots a value, that one should stay there forever.
If I were to make a comparison between different oscillators, the Momentum indicator is the most trustful one. The signals generated, no matter the method, are the most accurate as well. It can be used together with other indicators too for filtering fake signals. The result will be that traders will end up on the right side of the market.
The next two articles here on the forexgator.com will deal with the Morning/Evening Stars concepts when dealing with candlesticks charts and with tips and tricks when trading the oil market, what are the correlations to consider and why the Canadian Dollar is moving aggressively when oil data is released.