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Momentum - Measures the rate of change in currency prices (not the actual price levels). Ten (10) is a commonly used period for the momentum calculation. The momentum oscillator consists of the difference between the current closing price and the oldest closing price in a given number of periods; for example, the 10-day momentum is calculated by taking the current closing price, subtracting the price 10 days ago, and plotting the results around the zero line. The results plotted can be negative (current price is lower than oldest price) or positive (current price is greater than the oldest price). This indicator can be used as either a trend-following oscillator (similar to the MACD) or as a leading indicator.
The Momentum Technical Indicator measures the amount that a security's price has changed over a given time span.
There are basically two ways to use the Momentum indicator:
You can use the Momentum indicator as a trend-following oscillator similar to the Moving Average Convergence/Divergence (MACD). Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term moving average of the indicator to determine when it is bottoming or peaking.
If the Momentum indicator reaches extremely high or low values (relative to its historical values), you should assume a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator ( e.g., if prices peak and turn down, wait for prices to begin to fall before selling).
You can also use the Momentum indicator as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). This is often the case, but it is also a broad generalization.
As a market peaks, the Momentum indicator will climb sharply and then fall off — diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.
MACD (Moving Average Convergence/Divergence) - Consists of two lines. The first line (MACD line) is obtained by subtracting a 26-day exponential moving average (EMA) of a currency from its 12-day EMA.
The second line (signal line) is usually a 9 period EMA of the MACD line. The result is an oscillator that fluctuates above and below zero (0). Currency traders have different ways to trade the MACD. One way is to buy when the MACD line goes above zero and sell when it goes below zero. When the MACD crosses over the zero line, it means the 12-day moving average went higher (crosses over) than the 26-day moving average. This is nothing more than a bullish moving average crossover. When the MACD falls below zero, it means that the 12-day moving average crossed under the 26-day moving average, implying a bearish shift in the currency. Some traders also trade off the crosses of the MACD line and the signal line (its moving average); that is, when the MACD crosses over the signal line, it generates a buy signal and when it crosses below it, a sell signal is generated. Divergences between the MACD and the currency rate can also be traded .
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