Momentum indicator tutorial - Key takeaways
The momentum indicator is one of the most useful tools that a trader can have in his arsenal, however, it’s not as “strong” as other indicators such as volume or Pivot Points. It does not give clear and concise signals on when and where it’ best to enter the market. It simply supplies the trader with information that then needs to be analyzed further in order to make the best decision.
The most common “decisions” on this would be, positive momentum = enter market, negative momentum = close trades.
One of the best momentum indicator Forex traders usually use comes with an in-built volume indicator as well. The reason is that these two tools are very useful when combined together. The momentum indicator provides the information that there is either a positive or negative shift, and the volume indicator helps the trader understand whether or not that momentum is justified.
For example, if the volume shows that there is more demand than supply, then the positive momentum is justified, and placing a trade could be a good idea. However, if the supply is higher than demand, but momentum keeps showing positive, it may be best to wait a little bit for everything to correct itself.
The tool is not something that can be used alone. It simply shows what the market is going through, rather than directly telling the trader what’s the best course of action.
FAQ on momentum indicator Forex
How do I install the momentum indicator?
It is very unlikely that you will have to download or install the momentum indicator. The MT4 platform, as well as MT5 and cTrader, come with this tool pre-installed by default. However, if for some reason your software is missing this feature, the most reliable way to install it is to download from either the MetaQuotes marketplace or the cTrader website, depending on which software you are using.
Once you have downloaded the tool, simply find the file and follow these steps:
- Locate your trading software folder
- Copy and paste the momentum indicator file into your indicators folder
- Restart your trading software
- Find the indicator in the Indicators > Oscillators
Why should I use the momentum indicator?
The momentum indicator helps to better understand upcoming and past trends. The art of how to trade with the momentum indicator mostly lies in the understanding of the market itself. Once the trader figures out how the market works, the momentum indicator becomes a “double-check” tool rather than a primary tool. All in all this indicator has the potential to teach new traders the intricacies of the FX market to its core.
Should I use the momentum indicator for FX or stocks trading?
There is no clear answer for this, but considering the volatility and the things that affect each of these markets, most traders would say that the momentum indicator is designed for FX trading more than stock trading.
The reason being is that stocks are relatively easier to predict with news and analysis of its own for individual companies, while Forex pairs are slightly more unpredictable. All in all the top momentum indicator for FX trading is indeed made for FX, but can be used for stocks as well.
How to read momentum indicator?
The momentum indicator, also known as the Forex momentum meter, is a research tool that helps you determine the strength or weakness of the price movement of a specific currency pair. It introduces a whole new insight into the asset conditions in a market, which can usually prove beneficial to your successful trading endeavor. With this indicator momentum of an asset price is represented within the Relative Strength Index (RSI): you take a scale from 0 to 100, and check the price movement against it. If the score is lower than 30 (or 20), it's considered oversold and its price might start rising, whereas the scores above 70 (or 80) are considered overbought and they might start declining. The RSI score can be calculated within the MetaTrader momentum indicator, as well as in any other trading software.