What is Momentum?
Momentum refers to the speed or velocity of a price change in reference to a currency pair. Momentum provides an indication of the rate of change in price movements over a period of time to aid traders in determining the strength of a trend.
Using the Momentum Indicator
The Momentum indicator is used by traders to trade currencies which are in an uptrend by going long (buying) or going short (selling) in a downtrend. In other words, a currency pair can be indicating a bullish momentum, as in the price is rising, or a bearish momentum as in the price is falling.
Momentum is rather powerful and can indicate a strong trend, therefore, traders need to be able to recognise when they are investing with or against the momentum of a currency pair. The MOM indicator measures the rate at which a currency pair may rise or fall. Due to the fact that markets rise more regularly than they fall, momentum has been proven to be more useful during a rising market condition as bullish markets tend to last longer than bearish ones. Within the forex market, some traders may buy currency pairs early, while the price is beginning to increase. However, once the fundamentals kick in and it is evident that the currency has an upward trend the price then begins to take off. For a trader who uses momentum, it is most profitable when the price of a currency is moving at a high velocity.
How is Momentum Calculated?
Momentum is calculated by comparing the current price with the previous price from a selected number of periods ago, which is usually 10 days. The MOM indicator is the leading indicator in measuring a currency’s rate-of-change. The ongoing plot forms an oscillator that moves above and below 0. To look for bullish or bearish signals when using the Momentum indicator, traders usually look for divergences, centerline crossovers and extreme readings. Usually, the indicator is used in addition to the other signals.