Contents
- Mathematics of the indicator
- Momentum Forex Strategy
- Forex momentum trend strategy+EMA
- Forex Momentum Elder Trading Strategy
- Conclusion
Popular Momentum or the speed indicator enables to measure the price fluctuations of financial asset for a certain period. Any strong deviation which is easily distinguished by using this tool can be considered as a critical market condition which can be used for successful position opening. It serves as a basis for the Momentum Forex strategy.
Mathematics of the indicator
The indicator is traditionally located at an additional window and is not a mere oscillator. It should be noted that there are two approaches as to the calculation of a momentum.
A momentum is literally interpreted as «the movement size». The movement is evaluated in absolute measures, so that points, cents, dollars are used for the analysis of financial asset price dynamics. Therefore, Forex Momentum indicator has been originally calculated as a difference between the current market price and the price which was a number of periods back. When using such method of calculation, the central line will be located at zero level. Such Momentum has been built in all exchange terminals.
The indicator which is used in the majority of popular trading terminals, including MetaTrader4(5), mathematically represents the ratio of the present price to the price which has been fixed a number of periods back. Following this calculation we will receive the distorted Momentum - Rate of Change (RoC), or «change in the price speed». It shows a ratio of the current price to the price a number of periods back. Therefore, the central line of this oscillator is always located at the level of 100.
Such difference in the methods of calculation is not crucial for Momentum trading Forex as the marking under both formulas is almost identical. Usually smoothing, averaging and other transformations are not applied to results. Both methods most often use Close prices as the most precise indicators for the future movement forecast.
The larger the indicator parameter, the more slowly its line reacts to the changes in price. The concepts of zones of overbought/oversold do not exist for Forex Momentum trading. However, more precise assessment requires analysis of its behavior in relation to central level (0 or 100).
Momentum Forex Strategy
Such simple tactics is justified only on long intervals, for example, consisting of 100 and more candles. Emergence of extreme values says that the current tendency (growth or fall) will proceed. Nevertheless, such Momentum Forex strategy recommends opening transactions only after confirmation from additional indicators.
The second tactics Forex Momentum trading is based on signals of the indicator’s line crossing the line of level (0 or 100). Such technique can already be effective on shorter periods.
Sometimes for more exact determination of the pivotal moment it is recommended to construct fast moving average with the periods of no more than 5-10 candles on the Momentum line. Then a signal on purchase is a breakthrough of the line of own moving average from below up, and a signal for sale from top to down.
Work of Momentum as the advancing oscillator is based on assumption that a swing will be followed by a stage of prompt movement of the prices, and it is possible to catch a profit so far a great number of new participants join in a new trend. When the market approaches a swing point, then there often take place divergence situations with the price chart on the Momentum line which is rather strong trading signal.
The Momentum indicator is successfully used as the oscillator in case of breakthrough of the channel. In other words, if there is a the high (positive) Momentum during a flet, the current price is higher than the previous one and the ascending trend is more probable, than it is good time to buy. In contrast, if there is a low (negative) Momentum and the price falls (a bear trend), the best option is to sell.
A sharp reaction of the indicator at the moments of speculative price bounces that makes its signals absolutely incorrect is a shortcoming of Forex Momentum trading. Therefore, this tool can only be used in the complex strategies with various types of indicators.
Forex momentum trend trading system + EMA
Indicators: two moving averages of EMA(9) are red, EMA(30) - the blue line; the Momentum (14) indicator with level 100.
Trade asset: the main currency pairs in the period of stable volatility.
Timeframe: H1 - for the search of point of entry and holding the position.
Decision making requires availability of Demark line connecting 3 minimum or 3 maximum fluctuations.
So, for a signal for purchase the following requirements must be satisfied:
- the price breaks Demark line up;
- the Momentum line moves higher than the level 100;
- the EMA(9) line crosses the EMA(30) line from bottom to top.
For a signal for sale the opposite conditions are necessary:
- breakthrough of the line of Demark down;
- Momentum line movement is lower than level 100;
- crossing of the EMA(9) line and EMA(30) line from top to the bottom.
We enter the transaction at opening of a new candle. Crossing of moving averages after breakdown of Demark trend line is allowed. We put Stop Loss on behind a local extremum: for sale - higher than a maximum, for the purchase - lower than a minimum. We will close the transaction right after the Momentum line crosses level 100 in the opposite direction.
Forex Momentum Elder Trading Strategy
Indicators: EMA(19) moving average on closing prices and Momentum(18) with level 100.
Timeframe: for opening and holding a position on - H1. Strategy is based on multiple currencies, stable results are yielded by the main pairs - EUR/USD, GBP/USD, AUD/USD.
Alexander Elder always preferred trade in the direction of strong movement therefore we will use only trend characteristics of the Momentum indicator. The first signal which shall draw attention of the trader is the crossing level 100 by the Momentum (18) line.
As soon as an hour candle completely (or, at least, for 80%) is closed over the EMA(19) line we will enter a purchase at opening of the following candle. The Momentum (18) line at the same time shall move higher than the level 100.
Following Momentum strategy Forex it is necessary to close an hour candle below the moving average and to move the Momentum (18) line lower than the level 100.
As a rule Momentum Forex system signals appear consistently in such system. Availability of both signals is obligatory.
We put StopLoss on candle’s min/max before crossing level 100 by the Momentum line and we move further by means of a trailing in the direction of profit. The minimum TakeProfit is 2,5 times more than StopLoss.
Conclusion
Forex Momentum trading Stable strategies using the indicator can be constructed only provided that Momentum signals are used as additional. On the small periods and during unstable volatility its signals in general cannot be trusted to as its line is redrawn and the previous signals are cancelled.
This pulse indicator is the excellent sensor of the market force, but it is necessary to use it carefully. In spite of the fact that there is only one parameter, it is recommended to select it carefully for the current volatility of an asset and it is obligatory to test it on historical quotations in Momentum Forex trading.
