Trading Forex With Momentum Indicator

The Momentum indicator is one of the simplest indicator, yet it is also generates very useful insights over the market. In this article you will learn how to analyze and trade FOREX pairs using the Momentum indicator.

The momentum is calculated in a very simple formula: It's value equals the difference between each two consecutive candles (or bars). This calculation alone would result in many whipsaw signals with very low accuracy. This is why the values of the Indicator are smoothed using a Moving Average, typically a 14-periods Simple Moving Average.

The Momentum indicator can be traded in the following methods:

Method #1: Zero-Line Cross

The basis of this method is to enter trades when the indicator crosses its zero-line. It is recommended not to use the indicator values but use a smoothed version of it (a 14-EMA on Momentum). It is a very good trend-following method that produces good results in GBP\JPY and GBP\USD Forex pairs. A cross of the zero-line (or the 100 line in some trading platforms) indicates a trend shift in the pairs.

Method #2: Trend-Line Break

The basis of the second trading method, is to analyze chart patterns on the indicator Indicator - specifically the trend line chart pattern. It is analyzed the same way that price is analyzed - look for a trend line at the Indicator which is broken, and enter a trade in the direction of the breakout. This is a more sophisticated trading method that is not so popular, but still produces good signals. IT was first featured in Martin Pring's book, On Market Momentum. This book is dedicated to learning and analyzing the momentum indicator - and it is highly recommended.

Method #3: Separating Range and Trend

Another analysis ability that the Momentum indicator grants us, is the ability of identifying trends and ranges. This is done via the value of Momentum indicator - great readings indicate a strong trend, while a average readings (near the zero line) indicate that price is in range. This method is good for filtering periods of ranges in trend-following trading systems.