The indicator is often set to a baseline of in its reading. No indicator should be used to make trade decisions on its own. So if it is used for purposes of finding price reversals in the market, it should be paired with others to get better readings. If a momentum indicator is applied to highly speculative assets e. When there are assets of this nature, this can create price bubbles or very erratic trading behavior. At the same time, there is a lot of polarity among traders and investors on how to use momentum.

The thinking behind it can be analogized as follows. If a car is accelerating from being completely idle, its acceleration rate of change of velocity is getting higher but its velocity is still low. This would be akin to a security whose momentum is increasing but its price has yet to move too materially in one direction or another.

At some point during the trip, the car will stop accelerating and it will be at this moment that it is moving the fastest. This is the equivalent to when price will be moving the fastest in a security.

The momentum indicator should be paired with another tool to help filter false signals and improve their statistical accuracy. For this purpose, we can pair it with another price reversal indicator. The Keltner Channels, as explained in more depth in this article , use the touch of the top and bottom bands in order to find areas where price could be statistically likely to reverse. But first we need to establish what these rules are.

We can keep this six-point spread symmetrical based on trend. For an exit signal on long trades, we can take a touch of the period simple moving average SMA or a move below on the momentum indicator. For an exit signal on short trades, we can take a touch of the period SMA or a move above 94 on the momentum indicator.

On the very left side of the chart, there was an upward breach of on the momentum indicator but no concomitant upward touch of the Keltner Channel. But we finally see both occur later on, marked by the first vertical white line that extends across both charts.

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The horizontal lines show the price levels of the trade and show a decent profit for the short trade taken as part of the rules associated with this system. We need a break of momentum above or below 94 , a touch of the top band of the Keltner Channel or touch of the bottom band , and either a drop of momentum back into the range or touch of the period SMA. Again, the horizontal line on the momentum indicator bottom chart represents the level.

The first vertical line on both charts represents the instance where our criteria was satisfied resulting in a short trade. The second vertical line denotes trade exit due to a touch of the period SMA. The horizontal line on the top chart show the entry and exit prices. This trade made a slight profit. For a breakout strategy, we trade in the direction of high momentum levels, rather than taking a stretched momentum indicator reading as a price reversal signal.

For this we need to set up a new set of indicators.

Look at the highs

To keep things simple, we can use moving averages. For them to have value they need to be shorter in length. Trading with momentum is inherently a strategy that uses a short-term timeframe. We can set up a system involving both 5-period and period simple moving averages. The periods, as they relate to the daily chart, would encapsulate data from the past one week and one month, respectively. And thus our system for long trades will be based around the idea that the momentum indicator must be breached above a certain predetermined level with the fast SMA above the slow SMA.

In the chart periods with low volatility are shown as solid, red lines.

Following and understanding momentum

The momentum is shown as a green histogram. Signals occur when this histogram crosses the zero line upwards or downwards during a period of low volatility. In this example the momentum crosses the line upwards. This is a buy signal. The trader does not buy immediately upon the cross occurring.

He waits for confirmation.

Only when candle A is complete a position is bought at the opening price of candle B. This example is similar to the previous example. A buy signal occurs when the momentum histogram crosses the zero line during a period of low volatility. A position is bought at the opening price of candle B. In this example there are two periods of low volatility. During neither period the momentum histogram crosses the zero line.

So in both cases there is no trading signal. In this example the momentum histogram crosses the zero line at the same time when a period of low volatility is identified. This is not considered a signal to open a position. The longer the low volatility continues, the higher the probability of a break-out. Hence it is not necessary to act upon these premature signals when low volatility has just been identified. In this example the timeframe is set at 4 hours.

The first time the momentum crosses the zero line coincides with the beginning of the low volatility period. This is not a signal. No position is opened. The next signal is a buy signal. This is a valid signal. All these signals can be acted upon on the condition that the open position based on the last signal has been closed. MOMS is at its best after a continued period of low volatility. In the morning, when the markets become active again, these 24h CFDs will often show a nice break-out. This break-out can be exploited with the MOMS strategy.

The MOMS strategy uses a target price and a stop.