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Friday, April 22, 2011

Tips on Using Momentum Indicator

Tips on Using Momentum Indicator ; The momentum indicator indicates the speed of price movements over a period of time. Besides, it also tracks the strength and weakness of a trend as it progresses in time. Usually, the highest momentum is found at the trend’s beginning and the lowest at the end.

Some indicators include Commodity Channel Index, Oscillator, Linear Regression Slope, Intraday Momentum Index, Mass Index, Rate of Change, Relative Strength Index (RSI), Stochastic Momentum Index and Swing Index.

Tips on Using Momentum Indicator

Momentum indicator is a simple and easy-to-use technical analysis tool. It can be calculated as:

Momentum = Existing closing price – closing price N Bars ago

Where “N” represents the length of time and is the only input. So, if you want to calculate a ten day period of momentum indicator, subtract the closing price 10 days back from the current one. A longer period provides a better sense of the overall momentum for a given currency pair. However, it may be unable to detect fast shifts in momentum. The default period that most charting packages use is “12,” as it enables a reasonable balance between accuracy and timeliness (when the indicator goes above the zero line, you go long and when it is below that, you go short).

Good trading practice demands that traders keep a watch on change in direction of the indicator, transition angle and signal confirmation. Signal confirmation involves examining other indicators, patterns and trend lines to find differences between indicators and price action. It is also important to observe its behavior in and around pivot points.

Any disagreement between momentum indicator and chart prices suggest:

* Direction difference between a trend’s momentum signals and price indicate a developing weakness.

* Price spikes during weak momentum are warnings towards a trend change.

* Trend change can also happen during controversially strong momentum and sideways prices movements.

The indicator can also be an excellent addition to your existing trading strategy. Besides, it can also be used to predict trend change and price reversal at support and resistance levels. It also enables evaluating the market (whether it is oversold or overbought) in a non-trending state and identifies the potential reversal points before they occur. source http://www.forex-rateit.com/forex-blog/tips-on-using-momentum-indicator.html
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