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Momentum Indicator - How to Trade?

14-12-2018, 09:38 271 Education

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How to Trade With the Momentum Indicator

The Momentum is a technical analysis tool, designed with the sole purpose of identifying the trend strength, which is the velocity of price changes. The Momentum is displayed as a single off-chart line and is easy to follow. The indicator can be used on any asset and any timeframe — both novice traders and hardened investors will find it useful. Read the full article to learn more about the indicator and ways to use it.

How it works?
This indicator will compare the current price of the asset to the price several periods ago. The bigger the difference between the two, the higher the indicator readings will be. Should there be no difference at all, the indicator will remain at 0, pointing to a sideways market.



The Momentum indicator as displayed in the IQ Option trading platform
Four different quotes can be used: the indicator can compare maximum, minimum, opening and closing prices of the underlying asset. Closing prices are the most commonly used. However, for an alternative use of the Momentum, the other three can be applied, as well.

How to set up?
Here is what you want to do in order to set up the Momentum indicator:

1. Click on the ‘Indicators’ in the bottom left corner of the trade room.


2. Choose ‘Momentum’ from the list of available options.


3. Click ‘Apply’ in the new window that then appears.

The indicator is ready to use. Note that the period and the quote value can be adjusted in order to make the indicator either more sensitive or decrease the number of false signals.

How to use in trading?

The Momentum can be used for the purpose of receiving timely and accurate trading signals. It can also be utilized as an additional tool, that will help you confirm signals, received from other indicators.
The higher the indicator, the faster is the upward price movement. The lower the indicator, the faster is the downward price movement. When the indicator reading is equal to zero, there is no prevailing trend on the market (the market is flat).
There are several types of signals you can receive when trading with the Momentum.
First, it can be used as MACD. In such a case the trader would consider opening a short position (SELL) after a major peak and a long position (BUY) after a major trough. When using this strategy, it is important to confirm the signal with another indicator of different type.


Peaks and troughs as SELL/BUY signals provided by the Momentum
Secondly, it can also be used as an anticipatory indicator. This strategy is based on the premise of accelerating growth/decline in the end of the trend cycle. When the trend, either positive or negative, suddenly accelerates, it can be expected to run out of power soon enough. Although useful, this method is not 100% accurate, and should be used with care.
Thirdly, the Momentum can be used as supplementary tool to confirm or disprove signals, provided by other indicators. Be it Fractals, the Alligator or Bollinger Bands, the Momentum can help you make the right decision when the need arises.
The Momentum is a simple technical analysis indicator that can become a valuable addition to the collection of your trading tools. It will suit both novice and experienced traders, as it can be tuned up and adjusted to your trading strategy and style.

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