Momentum measures the rate of change of the currency pair.
Momentum = V - Vn
Where
V = latest closing price
Vn = closing price n periods ago
If there is no change of closing price, momentum equals to 0, which
is the central line of the indicator. When there is a rise of price,
momentum is greater than 0. If the closing price is smaller than the
closing price n periods ago, momentum is a negative value. The most
common period for n is 14, traders can adjust the value according to
their preference.
1. Detect overbought/oversold conditions
When momentum reaches upper boundary level, the pair is considered to be
overbought. If momentum reaches lower boundary level, the pair is
consider to be in oversold condition.
2. Spot divergence
3. Crossing the central line
The cross over of the central line is deemed as a change of direction of
the general trend. When momentum crosses below the central line, a sell
signal is issued, whereas a cross above the central line, a buy signal
is generated.
