Momentum In Forex Markets Behavioral Explanation

Momentum in forex markets behavioral explanation

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Definition

Momentum, in technical analysis, refers to the overall rate of change in the price of an asset. Momentum is calculated simply by taking the slope of the trendline, which tracks the price levels of an asset over time.

Traders often take momentum as a measure of the volume of a market.

If prices are changing rapidly in a market (meaning that momentum is high), it’s likely that a large number of traders are buying or selling the asset to push the price change in either direction.

Momentum in forex markets behavioral explanation

As such, extremely high or extremely low values for momentum are taken as signs that an asset is either overbought or oversold. If momentum reaches an extreme high, the asset is overbought; if momentum reaches an extreme low, the asset is oversold.

Buy signals are generated when momentum reaches an extreme low and then rapidly advances back upward across the zero line.

Momentum in forex markets behavioral explanation

Conversely, sell signals are generated when momentum reaches an extreme high and then rapidly falls below the zero line. Traders consider this a leading indicator of the price behavior of a given asset, and of the overall character of the market (either bullish or bearish.)

Related Terms

  • Chaikin Oscillator

    The Chaikin Oscillator was developed by Marc Chaikin to compare volume and price levels for an asset.

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  • Disparity Index

    The disparity index is a percentage measurement for the position of the current closing price of an asset...

  • Stochastic

    Stochastic is an indicator used in technical analysis.

    Momentum in forex markets behavioral explanation

    Stochastic compares closing prices in a market to...

  • Trendline

    A trendline is one of the basic components of most technical analysis patterns. To construct a trendline,...

  • Mcclellan Oscillator

    The McClellan Oscillator is a technical analysis indicator for determining the behavior of an overall...

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