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Momentum Indicator

The Momentum indicator in MT4 is one of the best indicators for measuring momentum. Read this article to find out more about its uses in trading! 

Applying the Indicator to Your Chart

The Momentum indicator comes as one of the basic packages of indexes available as part of the default versions of MT4 & MT5. The calculation behind it is straightforward. It works by making a comparison between a definite price and the price of a set number of times before that. first step is to select a value for N..“the number of periods that will be used for the comparison.”

The default value for N on MT is 14, but you can set it to the value you want. and The two comparison prices are the closing price of the latest bar, and the closing price N bars ago. The momentum is then calculated as follows:

Momentum = (latest close/close N periods ago) x 100

MT5 performs these calculations instantaneously and shows the outcomes for you below your main price chart.

To add a Momentum indicator to your chart, find Momentum below the Oscillator Indicators tab in the Navigator of MT5 (similarly located in MT4). Click and drag it onto your current chart.

The Momentum indicator is a trend-gauging oscillator available by default with MT5. You have access to RSI and Stochastic Oscillator. There are indicators for measuring momentum, such as the  SMI. These do not come as part of the default MetaTrader 5 platform and will, therefore, have to be downloaded separately if you are interested in using them.

Using a Momentum Trading Strategy

You can apply the Momentum indicator to provide trading signals directly, but it is commonly used as a confirmation tool. The plainest signal is to take any cross through the centreline as a signal, buying when the value rises from beneath 100 to above, and selling when it drops below 100 from above.

This is a rudimentary approach and should be considered with great caution before implementation. The timing of these signals can be difficult, meaning that you miss the move by the time the signal arrives. The timing can be improved by adding a moving average.

Using the Momentum Indicator as a Confirmation Tool

The index comes into its own when used as a way of confirming signals from a separate, main indicator. One of the best ways is to look for divergence between price and momentum, as a way of measuring the power behind a move. Your buy or sell signal would come from what you have picked out as your main indicator. Then you seek to confirm the signal with the Momentum technical indicator, by looking for whether the price/momentum divergence is either bullish or bearish.

Bullish

Bullish divergence suggests an oversold market and can be identified if the price goes down to new lows, but the Momentum indicator fails to make new lows.

Bearish

Bearish divergence suggests an overbought market. This is identified when the price increases to new highs but momentum fails to make new highs.

You would follow a buy signal from your main indicator when this is confirmed by bullish divergence from your Momentum technical indicator. Closely, only follow a sell signal when this is confirmed by bearish divergence. It’s often helpful to combine different indexes in this way so that the different aspects in their ways complement each other.

A further example of this is fusing momentum with volatility measures to form a squeeze momentum trading indicator.

Bollinger Bands gives a guide to volatility, extending in times of high volatility and narrowing when volatility is low. A Bollinger band squeeze is when volatility narrows to a previously low level. The direction of the breakout is not indicated by the Bollinger bands indicator. A squeeze momentum strategy would apply momentum as the means for gauging the direction.

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