So, here’s the scoop: J. Welles Wilder was the genius who introduced the momentum index back in the late 1970s, and he explained everything in his book "New Concepts in Trading Systems." For us traders, momentum is a key tool to figure out whether stocks are strong or weak in terms of price movement. On its own, this momentum indicator is great, but when you pair it with other technical analysis tools, that’s where the real magic happens. Historical data shows that momentum performs better in rising markets than in falling ones. We can use this indicator to generate trade signals and confirm trades, especially when monitoring price movements like breakouts and pullbacks.
If you're looking to get started, the best broker platform for binary options is Pocket Option. They’ve got an awesome selection of indicators, oscillators, and all the technical tools to trade confidently and make smart choices.
How do I set up the Momentum Indicator?
Calculating the momentum indicator is super easy! Just take the price differences over a specific time period. For example, to create a 10-day momentum line, simply subtract the closing price from 10 days ago from the most recent closing price. The first method simply takes the difference, while the second one looks at momentum as a rate of change expressed as a percentage. The resulting values will then be positioned either above or below the important zero line.
When I start the Momentum Indicator, it shows up in a separate window below your chart, looking like a moving average alongside those horizontal lines:
Basically, the further the indicator moves above or below zero or 100, the faster the price is changing. For instance, a difference of 0.35 indicates stronger momentum compared to 0.15. And when it reaches 98 percent momentum, it means the price is falling more sharply than it would at 99 percent.
The recommended setting for the Momentum Indicator on the PocketOption trading terminal for enhanced decision-making and strategies starts with a timeframe (n) of 10. However, some traders prefer increasing that to 14. Want to adjust those settings? Just click on the pencil icon next to the indicator and make your changes.
When you see the price crossing above or below the 100 line (or the zero line if you’re using that first version), it’s a potential buy or sell signal ready to go.
If the price goes above 100, it’s gaining momentum upward. On the flip side, dipping below 100 shows a loss of momentum.
For trades, I buy when the momentum indicator crosses the moving average from below, and I sell when it drops below the moving average from above.
But hey, keep in mind that this strategy has its quirks, especially that annoying whipsaw. You can minimize that issue by focusing on trade signals that align with the trending direction. If the trend is downwards, only jump into short trades after the indicator rises above the moving average and then drops back below. Time to exit that short trade when the indicator moves above the moving average.
How do I use Momentum Trading?
The momentum indicator isn’t hiding anything beyond what a careful look at the price chart would show. If prices are rising aggressively, that’s apparent on both the price chart and the momentum indicator.
The straightforward strategy? Buy when the momentum line breaks above the moving average from below, and sell when it drops below from above. It’s a simple approach, but we can enhance those signals by sticking with trades that align with the overall trend or acting only after the Overbought or Oversold conditions show up.
- CALL when the signal line crosses the level 100 from the bottom up.
- PUT when the signal line crosses the 100 level from top to bottom.
Just remember that the timeframe shouldn't exceed the formation time of 4 candles.
The great thing about this oscillator is its flexibility; it works well across all timeframes and with any asset. So whether you're diving into quick trading or taking a longer-term approach with extended expirations, it fits right in.
Sometimes, the momentum indicator can help reveal subtle changes in buying or selling strength. It’s best to regard this indicator as a sidekick to confirm a price action trading strategy rather than relying solely on trade signals. As mentioned, there are various signals you can generate with the Momentum Indicator—think 100 Line Cross, Momentum Crossover, and Divergence signals. Remember, no matter which Momentum signals you experiment with, blending technical tools into your strategy is a smart approach.
