Understanding momentum forex strategy

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Updated: 19 March 2020

As an oscillator, the momentum indicator is geared toward helping you identify how strong a price movement is. It helps you see by how much the price is fluctuating and over what time period, so you can more easily determine the ideal time to enter a trade. This momentum indicator has a single curve that moves within the parameters of an extra winder.

The basis for this forex trading strategy is being able to enter a trade at any major deviation, as revealed by the technical tool.

The calculations behind the indicator

The size of the movement is basically the momentum. To get to the momentum, you need to calculate the ratio of the present market price to the price at which it was a few periods ago.

If you take the central line of the oscillator to be at the 100 level, the larger the boundaries of the indicator – or, in other words, the period – the more slowly the line fluctuates, and the less it responds to price fluctuations.

Key trading strategies 

The current trend will remain if there are radical values on the chart made up of 100 or more candles. You still need to confirm that it is OK to enter a trade based on other indicators as well.

A drawback of the indicator is the immediate reaction it gives the moment there is a false breakout – for example, as a result of speculative trades. This is why you need other signals for confirmation to counter false indicator signals.

You can use these trading strategies based on the signals you will receive when the line crosses zero to 100 levels.

Construct a fast-moving average with periods of five to 10 candles to see where the best moment for action is. When the moving average crosses 100 from below up, that should be your signal to buy. When the moving average crosses the 100 level from the top down, that is the signal to sell.

When there is a breakout from trading channels, this is when the momentum indicator usually comes into play. It is the right time to buy if:

  • There is a high or positive momentum
  • The current price moves higher than the one before
  • The ascending trend is about to show

It is the right time to sell if:

  • The momentum is low
  • The current price is falling
  • The trend is bearish

The forex momentum trend trading system and exponential moving average

The main requirements are:

  • Momentum indicator (14) with 100 line
  • Timeframe: H1 – for finding the points of entry or holding the position
  • 2 moving average – 9-period EMA (red line) and 30-period EMA (blue line)
  • The Demark line connecting the dips/valleys and peaks of price movements
  • Any currency pairs in the period of stable extreme fluctuations, the most effective ones being GBP/USD, EUR/USD and AUD/USD.

Components of the purchase signal

  • The price should break up the Denmark line
  • The momentum line has to move above the 100 line
  • The EMA (9) must cross or move over the EMA (30) from the bottom upward

Components of the sell signal

  • There must be a breakout of the Denmark line down
  • The momentum line needs to move below the 100 line
  • The EMA (9) is crossing the EMA (30) from the top down

Ideally, you will want to open your new order at the beginning of a new candle, and be sure to place a stop loss close to the local high or low. In the case of the sell signal, it should be higher than the high you have identified. In the case of the buy signal, it should be lower than the near low. You can exit or close your transaction when the momentum line is crossing the 100 line in the other direction.