Momentum Analysis & Momentum Oscillator Signals
The momentum indicator uses math equations to calculate line of plotting. Momentum measures the velocity with which price changes. This is calculated as the difference between the ruling price candlestick and the average price of a chosen number of price bars ago.
Momentum represents the rate of change of the currency’s price over the particular time periods. The faster that prices rises, the larger the increase in momentum. The faster that prices decline, the larger the decrease in momentum.
As the price movement starts to slowdown the momentum also will slowdown & return to a median level.
Momentum
FX Analysis and How to Generate Signals
This indicator is used to generate technical buy and sell signals. The three most common methods of generating signals used in FX are:
Zero Centerline Forex Crossovers Trade Signals:
- A buy signal gets generated when Momentum crosses above zero
- A sell signal gets generated when Momentum crosses below zero
Overbought/Oversold Levels:
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 figure out the overbought and oversold 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 Trend-Line Break Outs:
Trend Lines can be drawn on the Momentum indicator connecting the peaks & troughs. Momentum begins to turn before price hence making it a leading indicator.
- Bullish reversal - Momentum readings breaking above a downwards trendline warns of a possible bullish reversal signal while
- Bearish reversal - momentum readings breaking below an upwards trendline warns of a possible bearish reversal signal.
Analysis in Forex Trading
