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Why Forex Momentum Indicators Are Popular

Published: 21st December 2020 10:59

Discover how it works and why it is so popular.

The foreign exchange is the largest financial market, and it is not easy for retail traders to succeed. Still, there are quite a few well-tested roadmaps that work for many people. Momentum is one of these favourites. Discover how it works and why it is so popular.

The feature helps you see whether a trend will continue or reverse. An efficient momentum trading strategy will let you pinpoint the best entry and exit. Once you understand its logic, you prefer it over any alternatives. Generally, it is most useful for swing traders.

The Key Principle

The term ‘momentum’ was borrowed from the works of Isaac Newton. He used it to explain why an object in motion is likely to continue moving until hit by an external force. For forex traders, this means that trends with strong momentum can be expected to persist. Weak momentum, on the other hand, points to a likely reversal.

These strategies reduce risk, as market participants base decisions on a confluence of factors. Basically, they “buy high to go higher”, or “sell low to go lower”. They always follow the direction of the movement provided there is sufficient momentum in it. The most preferable approach combines these indicators with price action.

Example: Three-Step Strategy

This system includes the use of the William %R indicator. It helps traders to see if the market is in an overbought or oversold state. This tool is one of the most convenient and informative technical indicators.

1. Identify Your Trend

On a price chart, an uptrend looks like a series of high highs followed by a series of high lows. If you have at least two highs and two lows, you are looking at a typical uptrend.

2. Do You See Bold Candlesticks?

These should close near their higher end; this confirms the price action. Candlestick length is an indicator of momentum. In a bullish market, you should see thick candlesticks that always close near the higher end.

3. Use William %R

It is one of the best indicators of this kind. Its value ranges from -100 to 0. Anything close to -100 means the asset is being oversold. Anything closer to zero means it is being overbought. The best moment is when the value is -80. It will then rally a bit, going above -50. This is when you should open a long position.

The Bottom Line

This phenomenon has a simple underlying principle. When it is strong, the trend will persist. Prices in uptrends are likely to keep on rising, and falling prices are expected to keep going down. When combined with other indicators, momentum can help you make a substantial profit in any trend.



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