Momentum Technical Analysis and Momentum Oscillator Forex Trading Signals
The momentum indicator uses equations to calculate the line of plotting. Momentum measures the velocity with which price changes. This is calculated as the difference between the current price candlestick and the average price of a selected number of price bars ago.
Momentum represents the rate of change of the currency’s price over those specified time periods. The faster that prices rises, the bigger the increase in momentum. The faster that prices decline, the bigger the decrease in momentum.
As the price movement starts to slowdown the momentum will also slowdown and return to a median level.
Technical Analysis and Generating Signals
This indicator is used to generate technical buy and sell signals. The three most common methods of generating trading signals used in Forex trading are:
Zero-Centerline Crossovers Signals:
- A buy signal is generated when Momentum crosses above zero
- A sell signal is generated when Momentum crosses below zero
Momentum is used as an overbought/oversold indicator, to identify potential overbought and oversold levels based on previous readings; the previous high or low of the momentum is used to determine the overbought and oversold levels.
- Readings above the overbought level mean the currency pair is overbought and a price correction is pending
- While readings below the oversold level the currency is oversold and a price rally is pending.
Trend Line Breakouts:
Trend lines can be drawn on the Momentum indicator connecting the peaks and troughs. Momentum begins to turn before price thereby making it a leading indicator.
- Bullish reversal - Momentum readings breaking above a downward trend line warns of a possible bullish reversal signal while
- Bearish reversal - momentum readings breaking below an upward trend line warns of a possible bearish reversal signal.