How to Understand the Momentum Indicator
financial chart

Momentum is a powerful common trading indicator which uses price to show why buyers and sellers want to buy or sell stocks. Utilizing the spirit of astrology using the North and South Pole, Momentum Indicator gives you an insight as to what happens in a situation before it actually happens.

What is the Momentum Indicator and how does it work?

The momentum indicator, when combined with the other indicators, can take your trading to new heights and can also help you reduce risk. This indicator is not something that you must use or should use. However, it is something that is worth adding to your trading system in order to make smarter decisions during market moves.

How to Use the MI

The momentum indicator is one of the most important indicators to use in support of your position. It displays the current momentum and the direction it is heading. This indicator is usually placed at the top of your chart because that’s where the natural human eye goes. Placing it at the bottom will make it easier to remember, while putting it on a different location may help others understand what you are trying to say with your charts. One of the most used indicators in tic-tac-toe is the momentum indicator or “MI.” It determines how a player’s chance increases with each new piece that his or her opponent plays. This indicator is calculated by counting all previous moves and dividing them by the number of pieces that remain in play. The remainder represents a player’s probability based on how many moves remain to them.

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How to read the MI

The momentum indicator on day trading charts gives traders the ability to identify a short-term weather pattern. Once a shape is identified, it must be evaluated very closely to determine what is needed and if it may continue. If you are looking at the weekly momentum indicator, you must get a snapshot of what the market and individual stocks are doing across the board.

The momentum indicator is used as a guidepost to understand and meaningfully measure periods of profitable price action in day trading.

When not to use the MI

The momentum indicator is great for trending. When the indicator tries to price trade, the system exhibits arbitraging behavior by trading higher and lower margins in an attempt to maintain a constant MI. In an industry where momentum indicators are often studied and discussed, there’s a lot of confusion when people view the momentum indicator. These indicators vary in weight with different options available from 3 to 10, some portfolios use up to 20. The most common situation for MI traders is when there’s a drawdown over any amount of time that suggests volatility may be present and the trade would be at risk for significant losses.


At the time this article was written, the momentum indicator has been available since February 2018. I still, however, think it’s important to write an overview of what the momentum indicator is and how we can use it in trades and other aspects of our trading.

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