How to Trade with the Momentum Indicator
This article will provide you with an insight into the Forex Momentum Indicator in MetaTrader 4 (MT4) and MetaTrader 5 (MT5). We will demonstrate how to use the Momentum Indicator to trade Forex, share a Momentum Indicator strategy and much more!
Table of Contents
What Are Momentum Indicators?
Momentum indicators are technical indicators which depict the momentum behind an asset’s price, by measuring the rate of its rise or fall. Momentum can be a useful tool in determining the strength, or weakness, of an asset’s price movements.
Amongst the most well-known and best momentum indicators are the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD) and the Momentum Indicator found in MT4 and MT5. In this article, it is the last of these three which we will be focussing on.
The Momentum Indicator Formula
Now that we know what momentum indicators are, let’s take a look at how the Momentum Indicator calculation is made.
The Momentum Indicator formula is actually quite straightforward, nevertheless, you won’t need to worry about doing the calculations yourself, as both MT4 and MT5 will take care of that for you. However, seeing how it is calculated provides us with a better understanding of how the indicator works.
The Momentum Forex Indicator makes a comparison between the current price and the price N periods previously, where N is a number which is chosen by the trader. The first step is to choose a value for N, whose default value in both MT4 and MT5 is 14, however, you can set it to whatever value you wish.
The Momentum Indicator is calculated as follows:
As already highlighted, both the MT4 and MT5 trading platforms will do the Momentum Indicator calculation for you instantly, displaying the results for you below the main price chart, as we will see in the following section.
How to Use the Momentum Indicator MT4 & MT5
The Momentum Forex Indicator comes as part of the standard package of indicators available with both MT4 and MT5.
In order to start trading with the indicator, you need to go to the ‘Navigator’ window on the left-hand side of the screen. Here, you will find the Forex Momentum Indicator in the ‘Oscillators’ folder within the ‘Indicators’ section.
Once found, click and drag it on to your price chart in order to bring up the Momentum Indicator settings, as shown below.
The default value for the period of the Momentum Indicator settings is 14. This value can be theoretically be changed to anything you like. However, when using any technical indicator for the first time, it is usually a good idea to start off with the default settings.
Once you become more acquainted with the indicator you can start to experiment to find out which settings work best for you and your Momentum Indicator strategy.
In the hourly GBPUSD chart above, to which the Forex Momentum Indicator has been added, you can see the indicator appears in a separate window to the main price chart, and is depicted by a single blue line.
You will note that, in the chart above, the Momentum Forex Indicator is plotted between the values of 102.56 and 97.91. When the indicator’s value is higher than 100, the current price is higher than the price ‘N’ periods ago. Conversely, when its value is lower than 100, the current price is lower than the price ‘N’ periods ago.
Furthermore, the how far the Forex Momentum Indicator’s value is above or below 100 demonstrates how fast the price is moving. For example, if the Momentum Indicator displays a value of 102, the price is rising more powerfully than it would be if the indicator was showing a value of 101.
This information can be gauged more easily by adding a centreline of 100 within the ‘Levels’ section of the Momentum Indicator settings.
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Momentum Indicator Strategy
So, how can you incorporate a Momentum Indicator strategy into your Forex trading? Whilst the Momentum Indicator can be used to provide trading signals, it is better used as a confirmation tool for signals generated by either price action or other technical indicators.
However, there are several ways you can use the indicator to judge which direction the price will move.
The most rudimentary of these Momentum Indicator trading strategies involves paying attention to when the indicator crosses its 100 line. Below is the same GBPUSD chart as above; however, this time, we have added the 100 line to the Forex Momentum Indicator.
Each time the Momentum Indicator crosses above the 100 line, this can be interpreted as a buy signal. Conversely, each time it crosses below the 100 line, it can be interpreted as a sell signal.
The logic behind this is that the fact the Momentum Indicator has crossed the 100 line means that the price is either rising or falling, depending on the direction.
However, there are downsides to this Momentum Indicator strategy. As seen in the chart, there are many instances where the indicator crosses the 100 line, only to cross it immediately afterwards in the opposite direction. This drawback can be limited by only acknowledging signals which complement the current trend.
Another drawback of this method is that, often, by the time the Forex Momentum Indicator has crossed the 100 line, much, or even all, of the price movement has been missed.
Forex Momentum Indicator/Moving Average Crossover
Another option for a Momentum Indicator Strategy involves adding a Moving Average to the Momentum Indicator and using their crossovers as trading signals.
In order to do this, find the Moving Average in the ‘Indicators’ folder and, instead of dragging it onto the main price chart, drag it on to the Momentum Indicator’s separate chart below. When the Moving Average settings dialogue box appears, click the drop down next to ‘Apply to’ and select ‘First Indicator’s Data’.
The moving average will then be applied to the Momentum Forex Indicator, as shown below. In our example, we have used a Simple Moving Average with a period of 30; however, as with the Momentum Indicator settings, this should be adjusted to whatever works best for you.
The signals here are generated in a similar way to before. When the Momentum Forex Indicator crosses above its moving average, this can be interpreted as a buy signal; when it crosses below, a sell signal.
As before, the accuracy of this Momentum Indicator strategy can be improved by only making trades when the trade signal is in the same direction as the trend.
Final Thoughts
As we have seen, the Forex Momentum indicator can be a useful tool for traders, particularly when gauging the strength behind an asset’s price movement.
However, it should be noted that the indicator does not provide an enormous amount of insight beyond what is already shown on a price chart. Therefore, the Momentum Indicator is most effective when used as a secondary tool alongside other technical indicators.
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About Admirals
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of, or recommendation for, any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
