Momentum Oscillators

Momentum measures the rate at which a currency price changes. In terms of trending, it is a very useful indicator of the strength of a currency price.

The rate at which currency prices are rising or falling is recognized by measuring the differences of prices over a certain time period. Thus, the momentum oscillator, which represents the net difference between the current closing price of a currency and the oldest closing price from the set time period, can help forex traders recognize trends.

Momentum Formula

In order to calculate the momentum (M), forex traders should apply the following formula:

M = CCP - CPn

Where:

CCP - current close price

CPn - close price n time periods ago

The obtained result of the momentum is plotted around a zero and can be either positive or negative.

Momentum Oscillator Indications

A rising momentum plot line above the zero line is considered an indication that an uptrend is developing. A momentum plot line that is starting to level off is considered an indication that the rate of the trend is slowing.

Oversold market conditions are depicted by the minimal values of the indicator, whereas overbought market conditions are presented by the maximal indicator values. An upward intersection of the zero line may be considered a buy signal, whereas an crossing down through the zero line may be considered a sell signal.

Additionally, the more the number of days included in the calculation of the momentum, the more the short-term fluctuations are offset. Conversely, the less the number of days, the more the momentum oscillator will be susceptible to the short-term noises.

Rate of Change (ROC) Momentum Oscillator

A version of the momentum oscillator is the rate of change (ROC). They differ in the way they are calculated and the formula by which their results are obtained.

The ROC technical indicator measures the percentage change between the current price and the price n time periods ago. In order to calculate ROC the following formula is used:

ROC = CCP - CPn / CPn

Where:

CCP - current close price

CPn - close price n time periods ago