Momentum is an oscillator designed to measure the rate of price change. It is defined by the net difference between the current closing price and the oldest closing price from a predetermined period. The indicator is easy to use and can be adopted right away by beginners of forex as well as by amateur players.
The formula for calculating the momentum (M) is:
CCP - current closing price
OCP - old closing price for the predetermined period.
In other words the momentum is what mathematicians call the derivative. If the derivative is zero we got a flat line. If it is positive and constant we have a stable uptrend. If it is negative and constant we have a stable downtrend.
Many traders consider momentum as the measure of the stability of previous returns from an investment. On the other hand many trading strategies assume either momentum continuation or momentum reversal.
The top forex news can effect the indicator by producing a delayed response with the change of the sign of the momentum. That is why the momentum is plotted around the zero line. At extreme positive values, momentum suggests an overbought condition, whereas at extreme negative values, the indication is an oversold condition.
Since the momentum is measured on an open scale around the zero line, it may create potential problems when a forex beginner figures out exactly what an extreme overbought or oversold condition means. On the simplest level, the relativity of the situation may be addressed by analyzing the previous historical data and determining the approximate levels that delineate the extremes. The shorter the number of days included in the calculations, the more responsive the momentum will be to short-term fluctuations, and vice versa.
The signals triggered by the crossing of the zero line remain in effect. However, they should be followed only when they are consistent with the ongoing trend.
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