The price in the markets is in constant motion. It rises and falls creating trends. The base of trading is buying and selling on price changes. To find the best points for the transactions you can use the help of indicators. Olymp Trade has many of them in its offer and today I will describe the one called the Momentum oscillator.
The momentum oscillator basics
The momentum is an oscillator that reveals the direction in which the price is moving. It is also possible to trade trend reversals with it. We say the trend is bullish when the price is going up and bearish when the price is falling.
Adding the momentum oscillator to the Olymp Trade chart
In order to trade with the momentum, log in to your Olymp Trade account and prepare your chart. Click on the indicators icon and you will see ‘Momentum’ on the unfolded list. Choose it and it will appear in the separate window beneath the price chart.
The momentum has a form of a line that oscillates around the value of 100. You may change its period however, I recommend leaving it at 14. The second visible line is a moving average of the first line.
How to trade with the momentum oscillator on the Olymp Trade platform
You can identify the trend with the momentum. You can also trade reversals of the trend. Let’s see how it works.
Opening fixed time trades on the downtrend
Imagine the downtrend in the market. You want to open a short position but you need to predict whether the price will keep falling or it will change the direction. Your task is to make sure there is a downtrend first. Then, check the indicator’s window. You receive a confirmation of a bearish trend when the line of the momentum crosses the 100 line and moves further down.
Opening fixed time trades on the uptrend
If you want to open a long position during the uptrend check whether there is in fact the uptrend on the price chart. The momentum oscillator should cross the middle line of the value 100 on its way up.
Using the momentum oscillator to trade bullish reversals
If you plan to open a position on the bullish trend reversal you should first wait until the momentum oscillator falls to the bottom. Then, you have to observe when the indicator begins to rise in the direction of the middle line.
Moreover, it is advisable to analyse two lines of the momentum and check whether the shorter average cuts the longer one from below. This means the bullish trend is developing.
Using the momentum oscillator to trade bearish reversals
If you want to open a trade on a bearish trend reversal, you should act the same way. Only in this case, you are waiting for the oscillator to reach the top values. Next, it should begin to move downwards toward the 100 line.
Additionally, you may check whether the shorter average intersects the longer one from above. This confirms a bearish trend creation.
Pros and Cons of Using the Momentum Oscillator
- ✅ Helps identify market trends and potential reversals
- ✅ Provides clear entry and exit signals
- ✅ Can be used in conjunction with other indicators and strategies
- ❌ May generate false signals in ranging markets
- ❌ Requires understanding of trend identification
- ❌ Does not guarantee 100% accurate predictions
Comparison of Trading Strategies
|Trend Lines||Identifies market trends, potential entry and exit points|
|Moving Averages||Smooths out price fluctuations, indicates overall trend direction|
|Support and Resistance||Identifies price levels where buying or selling pressure may emerge|
Trading is a risky business and you cannot expect that an indicator or a strategy will ensure a 100% winning rate. You must be ready for occasional losses. Nevertheless, using an indicator such as the momentum brings success closer to you. You have better chances to catch a good entry point. Remember, there are two signs you should identify before opening a transaction.
It would be a good idea to add another indicator to your chart especially if you want to trade on price direction with the momentum. This way you will receive extra confirmation for your trades.
Try different combinations in the Olymp Trade demo account. It is a free account that you can use as long as needed without the risk of losing your money. Once you discovered the strategy that suits you best, move to the live account to make real profits.
Frequently Asked Questions
- Q: How does the momentum oscillator work?
- A: The momentum oscillator measures the rate of price change to identify trend direction and potential reversals.
- Q: How do I use the momentum oscillator in trading?
- A: Look for the oscillator crossing above or below the centerline to confirm bullish or bearish trends, respectively.
- Q: Can the momentum oscillator be used for short-term trading?
- A: Yes, the oscillator can provide signals for short-term price movements, but it’s essential to consider other factors and indicators.
- Q: Is the momentum oscillator suitable for all markets?
- A: The momentum oscillator can be applied to various markets, including stocks, forex, and commodities.
- Q: Are there any limitations to using the momentum oscillator?
- A: Like any indicator, the momentum oscillator has limitations and should be used in conjunction with other analysis tools for better accuracy.
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