Best Momentum Indicator …Trading forex without the use of a momentum indicator is equivalent to building a house on desert sand, which quickly gets blown away when the storm comes. Every trader who wants to know the direction of prices before placing a trade would definitely need a reliable momentum indicator.
With the number of indicators on the market, how does one know the best momentum indicator to settle for? In this post, we shall take a look at the top-performing momentum indicators and the reasons why you need one.
What is Momentum Indicator?
A momentum indicator is a tool that a trader uses to comprehend rate or speed at which the price of security changes. They track the power and weakness of a trend as progress are made over a specific time frame. The tool registers the highest momentum at the commencement of a pattern. And it also records the lowest at the endpoint.
It is always better to use momentum indicators with other tools and indicators because they don’t identify movement direction but just the timeframe where the price change takes place.
Why you need a momentum indicator
You might be wondering about the advantages of using a momentum indicator. There are numerous reasons to deploy this tool in your forex trade. Some of the reasons to use the tool include:
- It shows price movement over time and how these movements are/will be, irrespective of the price direction, up or down.
- It works in conjunction with other technical indicators to show the strength of price movement and direction.
- It enables analysts and traders to pinpoint where there is going to be a reversal in the market. The divergence between price movement and momentum helps in identifying the points.
The Best momentum indicator
It is not easy to say that a particular tool is the best momentum indicator on the market. There are several momentum indicators, each having its unique features. Nonetheless, we are going to examine four different types of momentum indicators, which we believe have an advantage over the rest of the market.
Relative Strength Index (RSI)
The relative Strength Index (RSI) is one of the dependable momentum indicators. It acts as an oscillator, serving as a system of measuring changes in prices and the speed at which the changes occur. If analysts and traders search for divergence, failed swings of the oscillator, and when the indicator goes across the centerline, they can easily spot the signals. The indicator fluctuates between zero and 100.
RSI values over 50 indicate positive, uptrend momentum. But if the RSI reaches 70 or above, most of the time shows overbought conditions. On the contrary, when the RSI reading is under 50, it stands for negative, downtrend momentum. A likely oversold condition arises when the RSI readings are below 30.
The creators of Stochastic RSI designed the tool as a way of improving the regular RSI, to increase its sensitivity and dependability in the areas of trading off overbought/oversold RSI levels.
Tushar Chande and Stanley Kroll, who developed the tool, explained that the regular RSI indicator would, over a long period, trade in-between 20 and 80 levels without being able to reach an oversold/overbought area where several traders are on the lookout for prospects to trade.
Stochastic RSI can offer superior and more unique signals to trade, by combining RSI with Stochastic.
Moving Average Convergence Divergence (MACD)
The MACD (Moving Average Convergence Divergence) is among the best momentum indicators you can use to improve your chances of making profits in the forex market. It makes use of two indicators – moving averages. It takes the longer average out of the shorter one and turns them into an oscillator.
The MACD shows momentum while oscillating between moving averages while they converge, overlap, and move away from one another.
The MACD makes use of the 12-day and 26-day exponential moving averages (EMAs) and subtracts the 26-day from the 12-day. What you get is the MACD line, which is by and large graphed with a 9-day EMA. This operates as a signal line capable of identifying price movements.
The histogram is the most critical feature of the MACD. It shows the difference between the MACD line and the 9-day EMA. A positive histogram that is above the zero-midpoint line but starts falling towards the midline indicates a weakening uptrend.
On the other hand, a negative histogram that is below the zero-midpoint line but starts climbing towards it indicates a weakening downtrend.
The Momentum Indicator For MT4
This indicator was designed for traders who are trading on the MT4 or whose trading system is dependent on the Meta Trader 4 charting platform.
The Momentum Indicator For MT4 monitors and automatically calculates the momentum in price at a particular period, making use of the Momentum Indicator and various Moving Average indicators.
The results of the calculations from the momentum indicator and the moving averages are represented on a single signal line, which oscillates from the top of its sub window to the bottom. It uses this to inform the trader of the precise direction of the price with the more significant momentum at a specific period.
The Momentum Indicator for MT4 comes with some advantages which the traders can leverage to take his trade to the next level. Some of the benefits include:
- It gives the trader an insight into the direction of the highest momentum on the chart.
- Mere looking at indicator, the trader easily comprehends where the current market direction is heading.
- The indicator makes use of various types of Moving Averages to decide the current price direction in the timeframe from which the trader is currently watching.
- It enables the trader to make the right decision when placing his trades.
The Momentum Indicator For MT4 interprets the activities of the price by using different Moving Average Indicators. Some of these Moving Average Indicators include:
Alexander Moving Average
DEMA – Double Exponential Moving Average
DS EMA – Double Smoothed Exponential Moving Average
EMA – Exponential Moving Average
HMA – Hull Moving Average
Leader Exponential Moving Average
LRMA – Linear Regression Moving Average
LWMA – Linear Weighted Moving Average
Non-Lag Moving Average
PWMA – Parabolic Weighted Moving Average
SMA – Simple Moving Average
Smoothed Moving Average
Smoother Moving Average
Super Smoother Moving Average
SWMA – Sine Weighted Moving Average
TEMA – Triple Exponential Moving Average
TMA – Triangular Moving Average
VWMA – Volume Weighted Moving Average
Zero Lag Moving Average
To help generate a trade entry signal in the direction of the trend, the Momentum Indicator For MT4 would usually employ signals from the above signals collectively or individually.
Conclusion Best Momentum Indicator
The importance of the momentum indicator cannot be overemphasized. Every trader who wishes to understand the direction of the price trend to place order or go for profit must incorporate an indicator into his business.