Momentum Analysis & Momentum Oscillator Technical Signals
The momentum indicator uses math equations to calculate line of plotting. Momentum estimates the velocity with which price changes. This is calculated as the difference between the ruling price candle and the average/mean price of a chosen and selected number of price bars ago.
Momentum represents the rate of change of the currency’s price over the particular time periods. The faster that the prices rises, the larger the increase in force. The faster that the prices decline, the larger and greater the decrease in momentum.
As the price movement starts to slowdown the momentum also will slowdown & return to a median level.
Momentum
FX Analysis & How to Generate Signals
This indicator is used to generate technical buy & sell signals. The 3 most common methods of generating signals used in FX are:
Zero Centerline Forex Crossovers Trade Signals:
- A buy signal gets derived and generated when the Momentum crosses above zero mark
- A sell trade signal gets generated/derived when the Momentum crosses below zero mark
Overbought/Over-sold Levels:
Momentum is used as an overbought/oversold indicator, to identify the potential overbought and oversold levels based on previous values and readings: the previous high or low of the momentum is used to identify the overbought and over-sold levels.
- Readings above the overbought level mean the forex pair is overbought and a price correction is pending
- While readings below the oversold level the currency is oversold & a price rally is pending.
Forex Trendline Break Outs:
Trend Lines can be drawn on the Momentum indicator joining these peaks & troughs. Momentum begins to turn before price therefore making it a leading trading indicator.
- Bullish reversal - Momentum values/readings breaking above a downwards trend line warns of a possible bullish reversal setup while
- Bearish reversal - momentum values/readings breaking below an upward trendline warns of a possible bearish reversal signal.
Analysis in Forex Trading
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