Using an Oscillator in Forex Trading: Momentum Indicator and Strategies

The worst thing you can do with any indicator is set it up on a range of assets on a short time frame price chart and take every trade indicated on many assets. This will certainly lead to net losses – you need to be discerning and aim for trading only the higher-quality signals that you see. Practice will teach you the typical signs showing which signals will tend to be the most reliable. Falling and Rising WedgesWhen you are trading currency pairs in the Forex market, it is essential to know when the market can possibly reverse.

• If the indicator line then begins to rise, it suggests that the bearish trend is oversold and as a result, price may either go into a bullish reversal or a consolidation.
• The forex momentum oscillator helps identify the strength behind price movement.
• The slope of the line connecting the critical points of indicator shows whether the market’s interest in the current direction is growing or falling.

One of the greatest strengths of the momentum model is that it does not engage in low probability setups. Traders can fall prey to the impulse to try to catch every single turn or move of the currency pair. The momentum model effectively inhibits such destructive behavior by keeping the trader away from the market when the countervailing momentum is too strong. The most reliable way to trade stochastics is to use the above as a warning sign and wait for the stochastic lines to cross with bullish or bearish divergence. The background color of histogram changes to Majenta if a bullish divergence is detected on a higher time frame. On the other hand the histogram background changes to Lime for a bearish divergence.

Like most Forex momentum indicators, stochastic ranges from 0% to 100%, generating overbought and oversold trading signals. A Moving Average is a technical indicator that averages a currency pair’s price over a period of time. Moving averages are highly popular among forex traders, mostly because of their…

Exit the short trade when the indicator moves above the moving average. The momentum indicator can be used to provide trade signals, but it is better used to help confirm the validity of trades based on price actions such as breakouts or pullbacks. There are a few ways you can look at the indicator to see where a stock might go. Since momentum indicators rely on historical prices to calculate their output, they are identical for all assets. Traders can fine-tune settings based on sectors or individual trading instruments, but the functionality of momentum indicators does not vary between stocks, Forex, or any other asset class.

It compares the current closing prices of a currency pair over a period of time to understand the ongoing market trend. The indicator provides traders with values ranging from 0 to 100. Indicator is one of the most popular indicators, not just for momentum trading but for any technical analysis-based strategy.

Overbought/Oversold zones

The Momentum indicator consists of a single line, however, many traders also prefer to add a secondary line on the indicator which acts to smooth the signals. The second line is typically an X period Moving Average of the Momentum indicator. Keep in mind that the shorter the X period setting is, the more noisier the signal can be, which can lead to false signals. Longer period inputs for the X setting will result in better quality signals, however, the signals will tend to occur much later. The Momentum indicator in forex is a very versatile indicator and can be used in several different ways. It can be utilized as a trend confirmation signal, as well as a trend reversal signal.

The major difference between the classic MT4 indicator and the Tipu RSI indicator is the color changes of the overbought and oversold conditions. Firstly, the momentum reversal detector indicator histogram color changes to black if the indicator detects a change in momentum. To simplify traders can enter or exit the markets using the black histogram color change as it represents reversal of the momentum. Any oscillator value above the ZERO line indicates a bullish momentum, while any values below ZREO line are bearish. The crossover the signal line together with the histogram bars confirm the buy and sell trading signals. If the oscillator is above the Zero line, it indicates a bullish market momentum.

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A downtrend is formed when the price forms lower highs and lower lows. For this discussion,we’ll treat the sideways markets (range-bound or consolidating markets) separately. From the definitions above, a momentum indicator can be used to spot reversals, and can also spot breakouts from a range and the ensuing trend continuation (i.e. the breakout trades). Deepen your knowledge of technical analysis indicators and hone your skills as a trader.

When used in FX, it simply records the difference between the 12-period exponential moving average and the 26-period exponential moving average of a currency pair. In addition, a nine-period EMA of MACD itself is plotted alongside the MACD and acts as a trigger line. When MACD crosses the nine-period line from the bottom, it signifies a change to the upside; when the move happens in the opposite manner, a downside signal is made. Version 1 of the Momentum Indicator illustrates how easy it is to develop a trading strategy using this oscillator in conjunction with another indicator.

Overbought/oversold zones provide potentially profitable trade signals in a sideways trend. In strong uptrends and downtrends, these zones can indicate the levels of take-profits. The key support and resistance levels will also be a helpful tool when trading bullish or bearish divergence. The Bollinger Bands could serve as an additional filter to enter or exit trades. It requires some experience and understanding of the current market opportunities. To filter the Momentum trade signals, many traders like to add the Moving Average to the indicator.

Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. Determine your exit point after the Momentum reaches an extreme upper value followed by a crossing of the SMA “Red” line. Determine your entry point after the “Blue” Momentum line dips to a lower extreme and is followed by a crossing of the SMA “Red” line.

Trading Use

On the other hand, simultaneous reduction of the input value increases the indicator sensitivity respectively. If the input value is reduced below 7, it makes the indicator oversensitive to price movement thereby producing many signals of which most are false. The truly important aspect of the MACD is the histogram, which reveals the difference between the MACD line and the 9-day EMA. When the histogram is positive – over the zero-midpoint line but begins to fall towards the midline – it signals a weakening uptrend. On the flipside, when the histogram is negative, under the zero-midpoint line but begins to climb towards it, it signals the downtrend is weakening.

• It means that the price movement of equity, futures, or a currency pair is starting an uptrend or an ascending correction.
• There are a few ways you can look at the indicator to see where a stock might go.
• The stochastic oscillator is used to compare the most recent closing price to the previous trading range.
• The stochastic signals are easy to interpret, that is why it is quite popular among traders.

Differently put, the indicator analyses the relation between the price and the moving average. In the above example, the divergences, potential signals, are marked with purple in the chart. Enter a sell trade when the trend is down, and the momentum oscillator consolidates above level 100. Momentum with the period of 4 serves as an oscillator and generates trading signals. Set the indicator period so that the Momentum will serve as an oscillator.

Williams Alligator Indicator

Most of the time, price moves in synchronism with the Momentum. Any problems will mean a disruption in the power balance between sellers and buyers . Unfortunately, it was this formula that migrated to many automatic programs of technical analysis, so be careful.

However, traders can identify the market sentiment easily and trade accordingly. Once the momentum builds into the price combined with the volume, the oscillator moves sharply either in the up or downward direction. From a trading perspective, any oscillator value above the Zero line indicates a bullish trend. So, traders should look to enter the markets with a buy trade. On the other hand, stochastic momentum with arrows indicator values below Zero line indicates a bearish market trend.

It https://forex-world.net/ price with the previous price from a number of periods ago.The ongoing plot forms an oscillator that moves above and below 0. It is a fully unbounded oscillator and has no lower or upper limit. Bullish and bearish interpretations are found by looking for divergences, centerline crossovers and extreme readings. The indicator is often used in combination with other signals.

What is the Momentum Technical Indicator?

Identifying divergence automatically is another important aspect of this indicator. The indicator not only plots the divergence in the current time frame charts, but also alerts the trader of the presence of divergence in a higher time frame chart. The best application of the momentum indicator is identifying the divergences. Since, the momentum changes reflect pretty quickly in the indicator. However, much like everything else in Forex trading, there is always something that cannot be predicted that could hinder the progression of momentum. This is what people call a momentum fluke, as the market suddenly changes its direction with the indicator not having enough time to react.

This makes interpreting whether a currency pair is overbought or oversold subjective. Keep in mind, that you should not use the 100 Line cross in isolation as it can be prone to whipsawing. The point is to keep an eye out for where price is in relation to the 100 Line and use other filters to find the best entry opportunities. For example, in an uptrend, you may want to wait for prices to pullback to or below the 100 line from above, and enter after price crosses back above the 100 line. You could filter that condition with something such as a 3 bar breakout for entry. As Kenny Rogers once sang in «The Gambler,» «You got to know when to hold ’em, know when to fold ’em.» In trading, as in poker, this is the true skill of the game.

Imagine that the market suddenly makes a strong move up or down. It could be traders’ reaction to the news released, or it may be the result of a major manipulation by a big trader. Regardless of the cause, such a movement will be called an impulse movement or momentum. Based on the formula advised by John Murphy, the momentum indicators’ reading could be either positive or negative. The Keltner Channel or KC is a technical indicator that consists of volatility-based bands set above and below a moving average. Momentum is an unbound oscillator, meaning there is no upper or lower boundary.

The application of this indicator is versatile and is well suited for automated trading strategies. So, a multitude of auto trading software accommodates and implements the MACD indicator within them. Though the MACD indicator has a robust indicator input settings, they are very simple to interpret. Various MetaTrader indicators use different approaches and calculations to identify momentum. More interestingly, these indicators also combine other indicators and mathematical functions to enhance the trading performance. It is very unlikely that you will have to download or install the momentum indicator.

This crossover serves as our exit and we can close the trade with a nice profit on the trade. In this Momentum strategy, we will first wait for price to approach a key S/R level based on the higher timeframe. Then, we want to watch the price action closely and wait to see if a divergence pattern forms near the S/R level. Once we confirm the divergence between the Momentum Oscillator and price has occurred, then we will consider that a potential trade setup is progressing.

Keep in mind for this strategy, we want to use the higher timeframe to mark major support and resistance levels. Recall per the strategy described, we would want to wait until we have a break and close beyond the A-C trend line of the Zig Zag pattern. You will notice the A-C trend line is marked with a dashed red line. Sometime after the divergence pattern has formed, we have a strong break and close beyond the A-C trendline.

All of this evidence points to a possible reversal, so we want to be positioned to the short side. On the chart above, you will notice that price is in a strong downtrend. There are three Momentum divergence signals noted on the chart.

If you rely on the information on this page then you do so entirely on your own risk. The CCI value suggests that the S&P 500 has left the oversold zone and may have turned into a ranging or bullish market. When it goes under 100 and back above it, it’s understood as potentially a dip to buy within the uptrend. The ADX is the average of the -DI and +DI, which are calculated from the comparison of two consecutive ‘lows’ and the respective ‘highs’, using the average true range . Note that the S&P 500 charts below are used for educational purposes only and do not reflect the current market price of the index.

Since the Momentum indicator does not have an upper and lower boundary, you must visually inspect the history of the momentum line and draw horizontal lines along its upper and lower boundaries. Learn how to trade forex in a fun and easy-to-understand format. Let’s look at an example of this Momentum Indicator strategy in the market. As for trade management, we will look to place our stop loss beyond the most recent swing created prior to the A-C trend line breakout.