Momentum Trading Indicators or Strategies – Concept, Usage & more
Going past the data mentioned in this article, you will learn what the Momentum Trading indicator or Momentum Trading Strategies are.
If we refer to Newton’s first law, a moving body will always be in motion until an external force intervenes. We call it Momentum.
Now, to relate this here, Momentum Trading means that the price of any particular asset will follow the market trend. Now, of course, there are external forces similar to what Newton had suggested.
So, we will elaborate on what Momentum trading is, first, and then, we will discuss a few Momentum Trading strategies as well. So, let us explore now!
About Momentum Trading
A Momentum in our industry is a trend where the price of any particular asset moves. It can be a Momentum where there is an upward movement, or it can be a downward movement.
Now, of course, there will be a variety of reasons which can result in the break in the Momentum.
One thing you should know is Momentum Trading is a preferable option only for the long-term traders or investors. For a Day Trader or a Swing Trader, it is not relevant.
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What is a Momentum Indicator?
An indicator in the trading market is a graphical representation of any particular asset’s performance.
There are hundreds of indicators that serve thousands of purposes offering services whether you are a Day Trader, a Scalper, a Swing Trader, or a Position Trader.
Everyone needs to do the technical analysis of an asset to know how well it is going to perform in the future.
So, an indicator that lets you figure out the Momentum of any asset, whether it is upward or downward, is a Momentum Indicator.
Best Momentum Trading Indicators – List of Top Momentum Trading Strategies
Once we have a clear vision of what Momentum Trading is, we should focus on some strategies by which you can gain Momentum in the market.
Now, there are loads of indicators which can give you detailed reports. However, we are considering the most popular and accurate ones.
So, the top Momentum Trading Indicator or Strategies are as follows:
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Average Directional Index (ADX)
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Moving Average Convergence Divergence or MACD – Best Momentum Trading Indicator
The first in our list is the Moving Average Convergence Divergence (MACD). Arguably the most popular indicator to figure out the Momentum for a particular asset.
Now, the MACD consists of 3 chart elements. The first one is the actual MACD line. To calculate the MACD line, you should minus the 12 Period EMA from the 26 Period EMA.
The second element is the Signal line, which can be figured out by acquiring the 9-day EMA of the MACD line.
Finally, the Histogram, which you can calculate by subtracting the MACD line from the Signal line. All the chart element together combines and form the MACD.
Now, the core idea to use MACD is pretty straightforward. In the MACD chart, you should see some crossover points. It is called Divergence, which we have already explained.
Now, the point of Divergence changes the dynamics of the trend and should give you an idea of the entry and exit points.
Relative Strength Index or RSI – Top Momentum Trading Indicator
Next in our list is the Relative Strength Index (RSI). It is an incredible tool to identify the Momentum of any particular asset. Now, the way it works is relatively easy to understand.
There is a metric that ranges from 0 – 100 points. The RSI indicator is always fluctuating. However, there are some metric parameters if and when the chart shows, signifies some trends.
If the unit stays from 0 – 30 points, you can say that the asset is most probably Oversold. So, it is not ideal for you to make an entry for this particular asset at this time.
There is one more adverse range which we also won’t suggest you make a move – from 70 – 100. This specific range indicates the asset is Overbought. So, we won’t suggest you make a move then.
Now, the question is when to make a move? The range that remains in the RSI is the ideal scenario from where you can begin investing – 30 – 70.
What you should see in the point where the graph just made an entry to this favorable zone. If it is returning from an Overbought trend, the price would most probably go down.
Similarly, when the price is returning from the Oversold state, the price would go up.
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Average Directional Index or ADX – Best Momentum Trading Strategies
The last indicator that you should be aware of is the Average Directional Index (ADX).It is yet another popular tool that most trader use for technical analysis.
Now, if you try to know what comprises of an ADI indicator. It primarily consists of 3 lines – the ADX line, the Minus Directional Indicator (-DI), and the Plus Directional Indicator (+DI).
Now, every line has a distinct colour so that you can easily understand what is happening. The ADX is the black line, whereas the red is the -DI line and green is the +DI line.
What you should know is the ADX doesn’t provide any direction that you can follow. It uses the strength to figure out the trend.
Now, similar to most Momentum indicators, the ADX also expresses the massive change when a crossover event happens.
Here, there are two possibilities. When the green line intersects the red line and moves up, the general intuition is an upward market trend.
Subsequently, if and when the red line crosses the green line and moves down, it is probably the start of a downward market trend.
Divergence – An Overview
Divergence in the world of trading signifies a massive shift in Momentum or market trend.
It is a state where when the price chart is showing an upward or downward trend, and the indicator while following the trend suddenly starts to move in the opposite direction.
So, if the price chart is showing an upward flow, and the indicator is running in the opposite direction, i.e., the downward flow, we call it the Negative Divergence.
Subsequently, if the price flow is downwards, and the indicator is showing an upward movement, it is the Positive Divergence.
Both the Positive and Negative Divergence indicates the change in market trend to either move up or down significantly.
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Why to use Momentum Indicators?
Momentum Trading Indicators are pivotal to determine the momentum of any particular asset.
The price of an asset may always fluctuate, but with the indicators, you can figure out whether the Momentum is upward or downwards.
Of course, the indicators with give you an idea of the time frame of the Momentum as well.
One other factor where the indicators play a crucial role is to find the market reversal point. You can do that using the divergence between the Momentum and the price movement.
Another significant reason to use the Momentum indicators is to find out the moving averages. With the moving averages (MA), you can see the directions and price trends of any particular asset.
Momentum Trading Indicators – Conclusion
So, this is all the general information of some of the popular Momentum indicators and its relevant strategies that you can use to figure out the market trend.
What you should know is that, there are loads of Momentum indicators that you can use. We have chosen only the popular ones.
Also, we suggest you to use multiple indicators to be absolutely sure before investing.
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