Developed by Donald Lambert, the momentum indicator measures the difference between the current market price of a currency pair and the price of the same currency pair a certain number (n) of days ago.
Trading Momentum is very simple. Buy a currency pair when Momentum crosses from below the zero line to above or sell when Momentum crosses from above the zero line to below; however, to achieve better trading results from Momentum, below you will find the trading rules for use in both trending and ranging currency markets.
Formula
Popular trading signals from Momentum
I. Ranging Markets
Go Long when the Momentum indicator falls below the oversold level and then crosses the zero line from below;
Go Short when the Momentum indicator rises above the overbought level and then crosses the zero line from above.
II. Trending Markets
Is the market trending or not? First, measure the strength of the trend using a trend-confirming indicator such as ADX or draw a simple trendline to find out.
The Momentum indicator tends to stay above the zero-line during an up trending market and below the zero-line in down trending markets.
Take trading signals only in the main direction of the trend!
Up trending market: Go long when the Momentum indicator falls below the zero-line and then turns back above;
Down trending market: Go short when the Momentum indicator rises above the zero-line and then turns back below.
Please remember that Momentum, as with all other technical indicators should not be used by itself but should be combined with other indicators / studies to make a complete forex trading system.
