Forex traders use a variety of tools to understand market conditions and make decisions accordingly. For example, traders use momentum indicators to understand the rate at which the price of the forex rate changes. These indicators should be used with other tools since they only consider the timeframe for the price change, not the direction of movement. Some of the other technical indicators used with the momentum indicators are the moving averages and trend lines for the direction of price movement and price trends.
What is the Best Momentum Indicator?
The best momentum indicators are the most used trading indicators such as Relative Strength Index (RSI), Moving average convergence divergence (MACD), Stochastics, Commodity Channel Index (CCI). Momentum indicators measure the speed at which the price of a security is moving.
Using these indicators, traders make better decisions, are more comfortable finding the edge, analyze the impact, and get a better look and the chart.
Best Momentum indicators are:
- Relative Strength Index (RSI)
- Moving average convergence divergence (MACD)
- Commodity Channel Index (CCI)
Most indicators are oscillators. They do not predict market price; they explain better price charts, and technical indicators can help traders pick the proper entry and exit position.
Momentum indicators Advantages
The momentum indicators will indicate the forex rates’ movement over time, and the strength of these movements through the rates may increase or decrease. These indicators are helpful since they help the analysts and traders determine the point where the market is reversing. At the reversing point, there is a divergence between the momentum and movement in forex rates.
Divergence occurs when the forex rate moves in a particular direction, and the momentum initially in the same direction is no longer following the forex rate downwards. This indicates that the momentum indicator has diverged from the forex rate movement, and the current price movement is losing momentum. Divergence is noticed when the momentum is stalling and indicates the current trend in exchange rates is likely to end soon and reverse quickly. The divergence is considered bullish if both the momentum and forex rates are diverging in an upward manner. Conversely, if the momentum indicator and exchange rates were moving upward, and the indicator started moving downward, this is considered a bearish divergence.
Popular Momentum Indicators
Though there are many momentum indicators available, some of the popular indicators are listed below so that a trader can choose the Best momentum indicator.
Moving Average Convergence Divergence MACD
The Moving Average Convergence Divergence (abbreviated as MACD – see analysis) is a popular momentum indicator. The MACD uses two moving averages to produce an oscillator, deducting the longer average from the shorter average. These averages will overlap, converge, and move away, indicating the momentum. While the trader or analyst may choose any period, they are typically using the exponential moving average (EMA) for a period of 26 days and 12 days. The resulting MACD line is graphed against a 9 day EMA, which is used to detect when the price movement will turn. The histogram is used to determine the weakening uptrend or downtrend when the histogram is positive but moving downward, and the histogram is negative but moving upward, respectively.
The Relative Strength Index (RSI) (full review on our website) is another popular momentum indicator. Like the MACD, it is an oscillator that measures the speed of the forex rate changes. The value of the RSI fluctuates from zero to 100. A rising RSI value above 50 indicates a positive momentum, though if it increases above 70, it could indicate that traders have overinvested in the currency. Similarly, if the RSI value decreases below 50, there is a negative momentum or downtrend. However, if the RSI reading drops below 30, it could indicate that traders and investors have oversold the currency. Traders are using the RSI to monitor the divergence when the indicator crosses the centerline.RSI indicator can be used to calculate the strength of the currency pair.
Example of RSI bearish divergence :
Example of RSI bullish divergence:
Welles Wilder created the Average Directional Index (ADX) as part of his Directional Movement system. It consists of a Minus (-DI) and (+DI) directional indicator, ADX, which measures price movement direction, and momentum -DI and +DI are derived by comparing the consecutive lows and the corresponding highs. The ADX is calculated from the smoothed average of the +DI and -DI. If the ADX value is more than twenty, it indicates a market trend, and if ADX is less than 20, the market is considered to be directionless. The ADX only measures the strength of the movement, not its direction
Forex traders and analysts are using momentum indicators extensively, and these are important to help them decide on the forex rates when they should buy or sell forex. However, most traders use these indicators along with other tools, which also reveal the trend direction. Thus, after the direction of the change in the forex rate is determined, these indicators help provide information on the trends in price movement and when these trends are changing or reversing.
While we limit our evaluation to foreign exchange only, it is reasonable to assume that the other primary asset classes included in a typical managed futures portfolio, namely, fixed income, commodities, and stock indices, would also benefit from a combination of momentum macro/fundamental strategies.