A strong price pulse as a leading reversal signal has been effectively used by several generations of traders. To define critical zones and estimate medium-term trends, we recommend the classic Instant indicator.
The Momentum indicator is considered an excellent indicator of market strength and (which is very profitable!) the quality of its "work" practically does not depend on the type of trading asset. He came to us from the stock market, on speculative Forex the efficiency of its signals is somewhat reduced, but this disadvantage can be compensated.
Trade idea of the indicator
The instant determines the strength ("pace") of the market by comparing the current price Close with a similar price a few bars ago. There is a line whose fluctuations should warn us about the point of trend reversal.
The "rhythmic" increase in the current price (relative to the previous ones) is considered an indicator of the upward trend, if the current prices are steadily lower than the previous ones - the downward movement in the market. At the same time by max/min it is possible to estimate the state of overbought/resale. The accuracy of the indicator signals is greatly improved with the sliding average.
The leading properties of the Instant in terms of fundamental market theory are based on the idea that the market must first "slow down" before turning, that is, the movement along the current trend is slowing down. The Momentum indicator should see this first.
In J. Murphy 's book "Technical Analysis of Futures Markets," the classic formula looks like the usual difference between the price of the current bar and the similar price of n bars back:
Momentum = PriceClose(i) – PriceClose (i - n)
Such calculation is now considered "correct," but be careful: most often the relative value is used:
Momentum = (PriceClose(i) / PriceClose (i - n)) * 100
Sometimes in trading terminals, this formula is represented as a separate Rate of Change indicator in the range [0; 100]. Adding a smooth moving average to it makes it easier to further interpret the signals.
Parameters and control
The standard version of the Momentum indicator looks like an oscillator line in an additional window below the price graph. Basic parameters - calculation period and price type. For most assets it is the Close price that is recommended, but on exotic currency pairs or stock assets you can experiment with other types of price.
The calculation period depends on the working time frame: the shorter Moment will be more sensitive, but also the number of false signals increases dramatically. The increase in the parameter "cuts" the main mass of "nerve" oscillations and will clearly show the main trend.
The default period 14 will be optimal for periods not less than H1, in small periods (for more aggressive transactions) the value can be reduced, but the reliability of such signals is very low. The parameter depends on the largest period you work with. For example, if you trade and perform a D1 analysis, your optimal period for calculating the Momentum indicator is 20-21 (1 month = 21 trading days) - you get a trend analysis for the month.
We remind you that the Momentum indicator is calculated simply, even primitive, so any speculation quickly "breaks" its logic, and to recover, the indicator lines will need at least N bars. Instant on small periods on Forex is not recommended at all!
Everything is simple: The moment turns out to be positive if the current bar is closed above the previous ones, negative if the closure occurred below. When the price stands still, the indicator is considered zero. The angle of the line and will show you whether the market interest in the growth or decline of a trading asset is growing or decreasing.
We argue as follows: while the Instant indicator continues to show consistent max - in the market bullish trend and profitable deals for purchase, if there are a number of consecutive min-ms, the market is falling and sales will be safer. But if the price, for example, rises and the value of the Moment stops (or decreases), it is the first warning that the top of the market is almost reached and it is time to fix BUY positions. Or at least pull it closer to the StopLoss price.
The main trading scheme assumes using the Moment indicator as a traditional oscillator: the reversal should occur from a critical zone and further there should be a confident movement against the previous trend. The max/min value of the line assumes the continuation of the current trend.
We buy if the Instant line forms a depression and starts to grow. We sell if it peaks and turns down. But in any case we open (or close) positions only after the price confirms this signal.
A weaker but quite profitable signal is considered to be the crossing of the midline 100 of the Instant: bottom-up - purchase, top-down - sale.
The vast majority of trading time the Momentum indicator moves synchronously with the snout, but! Any conflict between sellers and buyers leads to a supply/demand imbalance and the indicator line should warn us in time. The divergence of the Moment line is worked out according to the classical scheme and remains the strongest signal of reversal.
Several practical advice
According to the indicator Moment is quite possible to trade from levels of overbought/resale, but there is a problem - clear boundaries, this line has no. It is necessary to define in addition. For this purpose, it is useful to combine it with channel indicators such as Bollinger Bands or Envelopes, then their dynamic lines will show us the areas we need. Trading according to such a method is recommended only in a wide fleet, because on a strong trend Moment gives many false signals.
Closing positions on the Momentum signal is not recommended: it either responds too early, which in principle is not bad, but part of the profit is lost, or hopelessly late.
Good results can be obtained complete with sliding average, but only on average rock and on periods from H4 and above - curious can look at the "Momentum Elder" strategy, which uses the EMA (19) Momentum (100) bundle.
Today 's too active market shows that the useful properties of the classic Momentum indicator are exaggerated. In fact, it is a conventional oscillator that too often produces an incorrect reaction to any speculative price throws (news, opening/closing of a week or session). To include the indicator in the trading system, it is necessary to carefully test it in different trading conditions, for a specific asset, period, volatility, study the reaction to fundamental events. Scalping with the Momentum indicator is impossible: it gives many false signals and is absolutely unrelated to volumes, even teak. The forecast of the Moment indicator can be applied only in long-term trade with mandatory confirmation of its signals by other instruments.