Momentum trading system is based on the indicator that measures speed of price's decline and growth. If indicator starts growing, it says that tendency accumulates its speed. If momentum's curve flattens out, it says that the growth fixed by previous Close prices is similar to the growth noted a certain number of periods before. If curve moves to zero, the growth continues, but its speed falls down and loses pace. Upon crossing zero point, the curve tells about short-term dropdown of price; if decline of the indicator continues, market will descend.
The indicator is built in a new window under chart as curve with one time scale. Zero level is marked on it, and around this level the indicator moves.
Application of Momentum:
1. Divergence/convergence signal is considered with the help of this indicator, as with the help of many others. If charts shows divergence/convergence, it is recommended to close all positions opened to the direction of current movement of price.
Since divergence is a strong signal saying about weakening of current tendency, it can end. Upon occurrence of divergence, it is recommended not to open any positions because it is an early signal. To open positions, it is required to wait for confirmation of signal obtained during technical analysis.
2. Crossing 0 level. When the indicator crosses 0 level, it is a signal for opening transaction in the direction of current tendency. When market grows, all signals sent by Momentum for sale shall be ignored, whereas signals for purchase shall be considered. Everything is opposite for descending market.
3. As on price chart itself, one can built resistance and support lines on Momentum. Signals received on such levels play supplementary role and can anticipate a possible change of current trend.
Rules of application of Momentum:
- Crossing of 0 level is used in trend, and transactions are conducted when trend's direction match.
- Resistance and support levels on Momentum are applied as supplementary and anticipating signal.
- Divergence/convergence is also used to find out an early finalization of tendency, and is the best option for closing position.
You might also be interested in: