The momentum is a technical indicator that can help you spot impending changes in price direction very early. To any trader with a trend-based trading approach, the momentum can be an effective tool to successful trading.
The momentum is one of the most basic uses of an oscillator. To calculate the rate of price change over a given time, the momentum oscillator simply subtracts the closing price of the first period from the closing price of the last period. The result, either positive or negative, is plotted around the zero line of the indicator and creates a graph. Is the last closing price higher than the closing price of the first period, the momentum oscillator will generate a positive value and vice versa.
How many periods you want to use depends entirely on your personal preferences and your trading strategy. Most commonly, the momentum oscillator is used over a time frame of 10 periods. If you choose a shorter time frame, the created oscillator line will be more volatile and quicker to react to price changes. A longer time frame will generate a will be smoother and slower to react to price changes.
How to read the momentum for binary options
The analysis of price change over a set period of time provides the trader with a first signal on how fast prices are rising or falling.
If the momentum line:
- is over the zero line, an uptrend is in effect over the defined time period.
- is rising, the movement is gaining momentum.
- is flattening out, prices are rising with the same speed as earlier.
- starts to drop prices are rising slower as they did in the preceding periods, and they are losing momentum.
- is below zero, roles are reversed. A downtrend is in effect. The further the line drops below zero, the more momentum the downtrend has.
- starts to rise again, the momentum of the downward movement is declining.
In other words: The momentum measures if the current price movement is accelerating or slowing down. On first sight, this might seem like a banality, but the momentum oscillator can predict impending changes in price direction earlier than most other indicators.
The design of the momentum causes its line to be ahead of the price movements. While prices in a weakening uptrend will still continue to rise, the momentum line, which measures the rate of price change, will pick up on the first signs of the weakening trend and start to fall. By the time prices start to flatten out, it will already begin moving in the opposite direction.
How to trade the momentum with binary option
When prices are currently at the same level as they were at the beginning of the time period used for the momentum, the momentum will have a value of 0. The direction in which the momentum crosses the zero line can be used to generate trading signals.
- If the momentum crosses the zero line from bottom to top, this indicates rising prices.
- If the momentum crosses the zero line from top to bottom, this indicates falling prices.
You can trade these predictions with binary options.
To trade the momentum successfully, make sure to use options with an appropriate expiration time for the time frame of your chart and the amount of periods used to calculate the momentum. Since the momentum indicates general price direction, it could possibly cross the zero line during a short reversal in the opposite direction of the generated signal. If you choose your expiration time too short, this will cause you to lose the trade. Therefore, make sure to give prices enough time to develop the indicated movement.