The momentum indicator in Forex helps a trader to identify the strength or sharpness of the price movement. This indicator will figure out the latest closing price and compare it to the earlier closing price. You will see this momentum as a single line in another section of the graph but not within the price bars or line.
Formula to calculate the momentum indicator in Forex
Developers have used a simple formula to calculate the momentum of the market, though there are different types of these formulas. This momentum (M) is simply the contrast between the latest/current closing price and the closing price in “n” sometime ago. To calculate the momentum, use the following equations –
M = current closing price – closing price (n periods ago)
M = (current closing price / closing price of “n” periods ago) x 100
The first equation will calculate only the fundamental difference between the two closing prices (one is the recent closing price, and another is the closing price of the “n” period ago). The second equation will determine the changing rate of the price, and this equation presents the value as the percentage. If you get confused, you can open a demo account at Saxo and test the indicators to get better insight.
How can you interpret the momentum value?
An investor can easily find out the trending types of the market, whether the market is following an uptrend or downtrend. Smart traders in Hong Kong can also find out the strength of the graph. To find out the momentum, you need to observe the positive or negative sign.
In the first equation, if the net value is positive, then it will indicate that the current closing price is higher than the closing price of “n” period ago. If the net value is negative, then it would suggest that the current closing price is lower than the closing price of “n” period ago.
In the second equation, if the net value of the momentum indicator is more than 100, it will indicate that the current closing price is higher, and a value lower than 100 indicates that the current price is lower than the closing price of “n” period ago.
How can you use a momentum indicator during a trade?
A trader can easily use the momentum indicator during his trading because it can provide a good signal.
- 100 line cross
If the net value of momentum is above 100 (using the second equation) or above 0 (using the first equation), it will represent that an investor can buy currencies (buy signal) as the price is losing momentum. If the net value of the momentum is below 100 or 0, it will indicate that the investor should sell the currencies (sell signal) as the price is gaining momentum.
To discover the buying or selling point, first, the businessman needs to draw a moving average line. This moving average should be the average closing price, and you can draw it considering the earlier closing prices of previous trades. It is recommended to buy the currencies when the momentum line crosses the moving average line and starts moving above and sell the currencies when the momentum line crosses the moving average line and starts moving below.
Professionals state that the momentum divergence is indeed a very powerful theory in the Forex market. A bullish or upward divergence takes place when the prices make lower lows, and the momentum makes higher lows. In contrast, a bearish divergence takes place when prices make a higher high, and momentum makes a lower high.
The momentum indicator is very useful in spotting the subtle shifts of the price. You can study more about momentum divergence to find out the way it works. This powerful concept can help you identify market trends. For the price acting FX business strategy, this indicator can provide you with more accurate information.