There are several indicators that traders can use to maximize their profits. Today, in this lesson we will learn what the momentum indicator is, how does it work, and how to calculate it. Also, we’ll review the step by step process of using this Indicator. then we discuss some of the strategies that we developed which you can use in your trading.
The Momentum MT4 Indicator
The Momentum Indicator is one of the leading oscillators used by traders to measure the security’s rate of change. It presents a single oscillating line, and delivers trading signals when the line reaches “extreme levels”.
How does the Momentum MT4 Indicator work?
The momentum indicator identifies the bullish and bearish movements of the price. It compares the current price of the security with its past price.
When the Indicator approaches or moves below zero, it will be a prior sign that soon the Indicator is going to give us a potential buy signal. And when it goes above the 100 and turns downward, it generates the sell signal. This indicator may show trend signals in various market conditions, but it works best to detect major price reversal in the market. It’s not advisable to use only one indicator to create buy/sell signals. Thus, the momentum indicator works best when it paired with other indicators. The image below shows the Momentum indicator.
Image Source: MT4
Momentum MT4 Indicator Formula
MOMENTUM = CLOSE(i)/CLOSE(i-N)*100
Where:
CLOSE(i) – It is the closing price of the ongoing candle.
CLOSE(i-N) – It is the closing candle price N periods ago.
Default settings or Change of setting mandatory for the MT4 Momentum Indicator?
The MT4 Momentum Indicator draws a single line on a chart. It looks a lot like RSI, but its default values and formulas are different. The default setting is a 10-bar period, although traders can use other values according to their trading style. It is the traders’ job to understand the market conditions and use the most appropriate value. Longer periods generate fewer signals although more accurate. Shorter values give more but also false signals.
Step by step process to Install the Momentum MT4 Indicator Indicator
The momentum indicator is a standard Metatrader indicator. Most brokers provide this Indicator in their terminal. If you use MT4, then by default this indicator is available in your terminal. Follow some simple steps to make this Indicator your own. Typically, most of the MT4 indicators show in another window at the bottom of the MT4 chart.
As shown in the image below:
Open your MT4 terminal. Then, click on the Insert window. There will be a couple of indicators available there. Select the Oscillator. Another box will pop up and click on the Momentum indicator.
Image Source: MT4
When you click on the Momentum indicator, a small box will prompt, showing you its parameters. There, you can change the period according to your trading style.
Below we share some of the techniques to use with the Momentum indicator. In the image below, you can see the Momentum indicator applied to a 60-minute EURCAD chart.
Image Source:MT4
Pros and Cons of the Momentum MT4 Indicator
If you use price action, then the Momentum Indicator provides you with an extra confirmation of the market movement. That is because it shows the early signals of the possible trend changes. The Momentum Indicator identifies the overbought and oversold situations in the market. So, it is an excellent indicator to find out the tops and bottoms of the market swings. In ranging prices or when the market is in a channel, it generates a lot of false signals becoming a headache for the traders. Using a single indicator is a significant challenge for traders to stay consistent in their trading. So, it is advisable to use another indicator in context with the Momentum Indicator for more accurate decision making.
Traders can build various trading strategies however using the “Momentum MT4 Indicator”
Crossover signals:
It would be easier for traders to find accurate signals in the market if they use it with another indicator. Traders can also add another line to the momentum indicator. A good one would be an SMA of the main indicator. The choice of moving average period mostly depends on the traders’ personality. The more aggressive the trader, the lower the length would use. Higher periods deliver less amount of signals. Most of the traders use 7,9,11,12,5,25-bar Simple moving average. So, the dominant idea is this: When the momentum indicator crosses the SMA line from above buy. And, when it crosses the line from below sell. In a trending market, both of the indicators work beautifully, and in most of the cases, it generates accurate signals.
Image Source:MT4
Momentum + Rsi Strategy
As we know, both momentum and RSI are the most popular leading Indicators in the market. Both indicators work coherently with each other. Here we have another simple strategy that makes money time and time again to the traders. The idea is: When the Momentum and Rsi are both at the bottom level, wait for the sudden reversal to the upside on both to buy. When both indicators reached the bottom, it was the clear sign of oversold conditions. This condition creates an immense amount of supply in the market. The sudden reversal on the indicators shows that the demand appeared in the market.
Image Source: MT4
The strategy is similar in selling conditions. Also, hit the sell when both of the indicators reach the peak and shows a reversal sign.
Image Source: MT4
Conclusions
- The momentum indicator displays a single line on the chart and its default period is 10.
- It could be the ideal tool for you in your day trading, as it shows leading signals of market action.
- It is a much more useful indicator with larger length {45,50,55,88,125 }.
- Also, as a leading Indicator, it spots early the oversold and overbought market. That gives you trend reversal signals ahead of time but it also gives you a lot of fake signals.
- Alone, the Momentum Indicator is not much beneficial, but if used together with others it gives you the unshakable solid edge. Now you know much better how to use the momentum indicator to maximise your profits.
