3 Ways to Use Momentum Indicators

Momentum indicators measure the speed and magnitude of price changes within a certain time period. In general, the momentum indicator will rise when the direction of the trend is strong, and vice versa will decrease when the trend is weakening.

In general there are 3 ways to use the momentum indicator, namely: as a trend following indicator, as a trend reversal indicator and as a leading indicator with a sign of divergence that occurs.

1. Determine the direction of the trend with the momentum indicator

The momentum indicator uses level 100 as a reference.

If the momentum indicator curve crosses level 100 from the bottom up, the price movement will tend to be bullish, and vice versa if you cut the level 100 from top to bottom then the price movement will tend to be bearish. To filter the direction of the trend in order to obtain a high probability momentum entry, you can use the simple moving average (sma) indicator, for example the period 20 high school as in the example above.

2. As an indicator of forwarding the trend or reversal of the trend

In this case the momentum indicator can show overbought and oversold levels as well as the RSI or stochastic, but because the overbought and oversold level zones cannot be determined (relative), then we must pay attention to extreme conditions with certain assumptions. If the momentum indicator reaches the highest or the lowest level (relative), we must assume the direction of the trend will continue as before until price movements change.

For example if the momentum indicator reaches the highest level and then drops then we assume the price will still rise, and we will only sell sell if the price has actually dropped. To be safe it can also be confirmed with the moving average indicator.

In the example above the direction of the arrow shows the forwarding of the trend because the price movement is still above the moving average curve.

3. See the signal from the divergence between price movements and the            direction of the momentum indicator movement

The following example is the occurrence of bullish divergence (blue line) and bearish divergence (red line).

A bullish divergence that implies a trend reversal (from bearish to bullish) is if the price movement shows a lower level than before (lower low), while the momentum indicator shows a lower level higher than the previous high low.

A bearish divergence that implies a reversal of the trend (from bullish to bearish) is if the price movement shows a high level higher than the previous high, while the momentum indicator shows a high level lower than the previous high (lower high).

Well that's the trading strategy and how to read and use the momentum indicator. Hopefully it will be useful for you, as a way and strategy to win in playing trading so as to produce consistent profit.

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