Momentum Oscillators are used in the range bound markets and tell whether the market is overbought or oversold. Now, you should always keep this in your mind that price action is the basis of charts and all indicators. Momentum indicators are always lagging and secondary to the price action. They are used in a sideways market.
Momentum indicators are mostly based on the moving averages that themselves are lagging in nature. When the momentum indicator begins to decline and the price action is rising, this is an indication that the price is losing its momentum.
However, when these momentum oscillators move in the opposite direction of the price action, they become leading indicators and this is the basis of divergence trading. These oscillators are mostly used in identifying divergence patterns that are important trading signals on trend reversal and trend continuation. Let’s name a few momentum oscillators;
The MACD Oscillator.
The most important amongst them are the MACD and the Stochastic. MACD is a very versatile indicator that works very well in the Forex market. Many pro Forex traders only use MACD. The other important indicator is the Stochastic that comes second to MACD in its importance in my opinion. Both are used in divergence trading.
MACD is comprised of two lines and a histogram. The dark MACD line is the difference of two exponential moving averages, the 12 day EMA and the 26 day EMA. The Signal line is the light line and is the 9 day EMA of the MACD. The MACD Histogram is the bar chart of the difference between the MACD line and the Signal line.
MACD oscillates above and below the zero line that is also known as the Centerline. Positive values means that the upside price momentum is increasing while the negative values indicate that the downside price momentum is increasing. Signal line crossovers are common and can be taken as buy and sell signals. However, the centerline crossover coupled with the signal line crossovers are more accurate buy and sell signals.
You can use the slope of the MACD Histogram in trading divergences. When the price action is sloping upwards and the histogram is sloping downward, it is considered to be a bearish divergence signal meaning a potential trend reversal from up to down.
In the same manner, when the price action is sloping downward and the histogram is sloping upwards, it is a bullish divergence signal indicating a potential turning of a downtrend into an uptrend. Whatever, you should master MACD Momentum Indicator if you are interested in trading Forex seriously.