The Forgotten Trading Indicator | Forex & Stock Market Strategies With Momentum Indicator


Let’s consider that the market suddenly
makes a large movement in one direction. Perhaps this movement is in response to new
information coming into the market, or it can simply be a result of a random price spike. No matter the reason behind the price fluctuation,
this type of sharp movement is called a momentum move. This means that the market accelerated. As the price movement starts to slow down,
the momentum will also slow down. Now, wouldn’t be ideal if you entered when
the market momentum was increasing? Of course, when you have momentum on your
side, trading becomes easy. When you enter during a lack of momentum,
your trade will stagnate or even worse, you will get chopped out by lateral price movement. That’s why today we’ll talk about momentum
indicator and you’ll learn how to take signals in order to synchronize with the market when
is ready to make a significant move. Also, make sure you subscribe, click the bell
icon so you don’t miss our future uploads, and leave us a like to show your support. Momentum indicator is an oscillator which
identifies the strength or speed of a price movement. The momentum indicator compares the most recent
price to a previously determined price and measures the velocity of the price change. So basically is the difference between the
most recent price and the closing price of a previously determined period,
The faster the price increases, the bigger the increase in momentum indicator
The faster the price decreases, the bigger the decrease in momentum indicator The most used settings for the momentum indicator
are 7, 14, or 21. Momentum settings with values over 21 make
the indicator less sensitive. This will result in fewer, but better quality
signals and a smoother line of the indicator Momentum settings with values below 10 make
the indicator oversensitive. This will result in more market noise. Lower settings on the momentum indicator should
be carefully traded, as it can lead to many false signals. Here is how you should read the momentum indicator
when you analyze the trend: If the momentum indicator is above 0 level,
this signals that the market bias is on the upside
If the momentum indicator is above 0 level and the market price is increasing, this signals
that the trend is accelerating. This implies that the current upward trend
is strong and likely to continue. If the momentum indicator starts declining
but is still above the 0 level, this means that the trend is still on the upside, but
at a reduced rate. This signals that the market is losing upward
momentum. This doesn’t mean that a reversal or trend
change will happen, it’s just a warning sign that the momentum is getting weaker. If the momentum indicator is below 0 level,
this signals that the market bias is on the downside
If the momentum indicator is below 0 level and the market price is decreasing, this signals
that the downtrend is accelerating. This means that the current downtrend trend
is strong and likely to continue. If the momentum indicator starts increasing
but is still below the 0 level, this means that the trend is still on the downside, but
at a reduced rate and signals that the market is losing downward momentum. As in the case of an uptrend, this does not
mean that a reversal or trend change will happen. Ok, now let’s see how to trade with momentum
indicator. One of the most common ways in which traders
use the momentum indicator, but not the smart way, is to take signals when the oscillator
crosses the 0 level. When momentum indicator crosses above zero,
a buy signal is generated When momentum indicator crosses below zero,
a sell signal is generated If we analyze this tesla chart, we might get
fooled by the last 2 valid signals generated by the momentum indicator. As most indicators, during trending conditions,
the indicator will offer good signals. But what about when markets are not trending? Look at this. You can see at least 4 or 5 false signals
which would have damaged your account. Despite the fact we are analyzing the d1 chart,
we can clearly see that the indicator is not reliable for generating good signals when
used alone. So, you should never use momentum as a standalone
tool. Pay attention to key levels, identify the
major areas of support and resistance and use momentum as an additional confirmation
instrument, to confirm your bias. Now, let’s look at the same chart once again,
let’s plot the support and resistance lines, identify the trend using price action and
let’s see what the momentum is telling. So we are in a clear downtrend, with the price
making lower lows and lower highs. This tells me to ignore when the momentum
crosses the 0 line to the upside and focus only on short trades. Good, now let’s plot major support and resistance
lines. Here is the most important trade, our entry
point. We have a breakout of a key support line,
with the retest of the breakout level and the momentum staying below 0 line. A short around this area was a high probability
trade, because we had price action and momentum indicating the same thing. The momentum oscillator can also detect divergences. A divergence occurs when price action differs
from the evolution of momentum oscillator. This basically means that the momentum isn’t
reflected in the price, which could be an early indicator of a reversal. As in the case of stochastic or rsi oscillators,
when a divergence occurs, a potential change in price direction could be on the cards. This is how i spot divergences with the momentum
indicator: I like to determine the main trend by adding
a 200-period exponential moving average. When the price trades above the 200-period
exponential moving average, i consider taking only long entries and when the price trades
below the 200-period exponential moving average i enter only short entries. I search for divergences between the momentum
and the price only in the direction of the main trend indicated by the 200-period exponential
moving average So, if the price trades above the 200 EMA,
I search for divergences on the lower side of the momentum indicator and if the price
trades below the 200 EMA, we search for divergences on the upper side of the momentum indicator. I enter when i spot a divergence in the direction
of the trend, when the momentum crosses below or above the 0 line. Also, if you aren’t familiar with divergences,
i recommend you to watch this video after you finish this one. Let’s use the same tesla stock, this time
on the hourly time frame. We added the 200 EMA, the price is below it,
lower lows and lower highs, so a clear downtrend. We search for divergences on the upper side
of momentum. Here is a first divergence, the price making
higher highs and momentum indicating lower highs. You enter short when the momentum crosses
below 0 line. Here’s a hidden divergence. The price is making lower highs but the momentum
shows higher highs. You enter when the momentum crosses the 0
line. You see how important this rule is. You cannot enter just because you see a divergence. The price could increase even more. By waiting for the 0-line cross, you have
a protection buffer, and enter only if the downward momentum is strong. Also, i know you will be tempted to take regular
divergences on the lower side of the momentum. I noticed this divergence here, and yes, it
was a good divergence trade and another one here, with a potential entry here, a perfect
trade, almost catching the market bottom. However, I trained myself to ignore the signals
that aren’t in line with the main trend. I lost a lot of money entering countertrend
positions. This technique will save you a lot of bad
entries, which at the end of the day, are contrary to the primary trend. I want to ride the main trend, and all the
setups that occur in the opposite direction will be ignored. In order to smooth the signals offered by
the momentum indicator, many traders prefer to add a moving average on it, like in the
case of the RSI, to take crossover signals. Now, when you want to trade a crossover between
the momentum oscillator and a moving average, you should be aware a crossover will be effective
when markets are trending. When markets are trading in a range, this
system will not work. This problem can be diminished by once again
responding only to signals in the trending direction. In this case, if the trend is up, make a long
trade only after the indicator has moved above the moving average. I still prefer the 0 line cross in combination
with price action, but you could test different moving average periods and momentum indicator
settings to find a combination that works for your trading style. If you found value or learned something new,
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14 thoughts on “The Forgotten Trading Indicator | Forex & Stock Market Strategies With Momentum Indicator

  1. hi, please make video in stoch rsi, it will be very helpful to understand it by your video.

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  3. This one is a good video: it explains an indicator AND shows how to use it. Still, an estimation of the strategy effectiveness is missing even if only rough (e.g., can we reach 60% win ratio, etc.). With that info this would become an excellent video.

  4. Useful and infomative video as always. But my question is:
    How can we know which indicators to use? It depends on the trading style. But how would you categorize an indicator? And, how many indicators would you use?
    I think a general and practical video on using many different indicators for different trading styles would be awesome

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