Momentum indicators measure the speed and magnitude of price changes within a certain time period. In general, the momentum indicator will rise when the direction of the trend is strong, and vice versa will go down when the trend is weakening. In this article we review the use of momentum indicators are original, not derivative such as the Commodity Channel Index (CCI), Relative Strength Index (RSI), or stochastics.
Momentum indicators are also commonly referred to as Rate of Change (ROC). Dikur momentum in a given period of time with the formula:
Momentum at time period n = (today's closing price / closing price at period n) x 100
The default time period that is often used is 14.
In general there are three ways to use momentum indicators, namely: as a trend following indicator, as an indicator of a trend reversal (trend reversal) and as a leading indicator to the cue divergence occurs.
1. Determine the direction of the trend with momentum indicators
In the Metatrader trading platform, using momentum indicators as a reference level of 100.
if the momentum indicator curves cut the 100 level from bottom to top, then the movement will tend to be bullish, and vice versa if the cut off level of 100 from top to bottom then the movement will tend to be bearish. To filter (filtering) the direction of the trend in order to obtain a high probability entry momentum, can be used indicator simple moving average (sma), such as the 20 period sma example EUR / USD daily above.
2 As an indicator of the direction of the trend continuation or reversal of a trend
In this case the momentum indicator can indicate overbought and oversold levels such as RSI or stochastic, but because of the level of overbought and oversold zones can not be determined (relative), then we must consider assuming certain extreme conditions. If the momentum indicator reaches the highest or lowest level (relative), we have to assume direction of the trend will continue as before until the movement of the price change.
For example, if the momentum indicator reached its highest level and then down then we assume the price will still go up, and we will only sell if the entry price has really come down. To be safe can also be confirmed by the moving average indicator.
In the above example the direction of the arrow indicates the direction of the trend continuation because price movements are still above the moving average line curve.
3 Seeing cues of divergence between price movement and direction of movement of the momentum indicator
The following example is a bullish divergence (blue line) and the bearish divergence (red line).
Bullish divergence signaled trend reversal (from bearish to bullish) is if the movement showed a low level that is lower than the previous (lower low), while the momentum indicators show low levels higher than previous lows (higher low).
Bearish divergence signaled trend reversal (bullish to bearish on) is if the movement showed high levels higher than previously (higher high), while the momentum indicators show a high level that is lower than the previous high level (lower high).
