Momentum Indicator and Strategy

By | February 13, 2014

Thursday, February 13th, 2014 by Tim Lanoue

Binary options is the most popular and liquid form of trading available to the public.  More often than not you will hear people brag about how much they made in this industry but little do most people know that profiting with binary options is extremely difficult.  It takes luck, dedication, and experience to thrive in this booming online trading industry.  The purpose of today’s article is to provide you with fundamental knowledge about the momentum indicator and a trading strategy that can be implied with this indicator.

The momentum indicators main function is to access the rate of acceleration caused by an assets price change.  Theoretically, this indicator helps predict the future direction of an asset allowing traders to trade with the momentum of this indicator.  The momentum indicator can also be classified as an oscillator indicator because it reflects values and helps identify trend lines.

The Setup

Proper setup is the most important aspect when it comes to any online trading strategy.  If you are not watching proper assets, using appropriate time frames or expiry times your strategy is bound to fail.  When using the momentum indicator we want to restrict our asset usage to assets that only display a low amount of volatility.  Common assets that have this characteristic would be the EUR/USD, USD/CHF and Gold.  The next step to ensure a proper setup would be to make sure our time frame is appropriate, with this strategy we want to use a time frame consisting of 5 to 15 minutes.  When I trade with this strategy I use the charting solution www.freestockcharts.com because the majority of their indicators have preset values so oftentimes I don’t have to customize the settings of their indicators.

The Momentum Strategy

Now that we have the proper setup the implementation of the strategy portion is relatively simple and it generates pretty solid trading signals.  In the picture below you can see how this indicator would look and how the strategy is applied.  We only need to wait for two factors to occur before a can place a trade.  The first factor that needs to happen would be that we need a break to occur with our yellow momentum line and our dotted white momentum line valued at 100.00.  The second factor that signals to us that a trade can be placed is if the candles above the break are heading in the same direction as the break between our two lines.  In the first example in the picture below you can see there is a break in an upward direction with our yellow and white dotted line.  Then directly above that break there are bullish candles, signaling to use that the momentum of the asset is still climbing so we place a call trade because our break was upward and we have bullish candles.  When it comes to placing put trades we need our yellow line to break our white dotted signal line in a downward direction and there needs to be bearish candles above the break in order for us to place a put trade.  Now if there is a break between our two lines that don’t have matching candles above we do not place a trade, it becomes a wash.

The signals generated with the momentum indicator are relatively strong but can be improved when used in combination with other trading strategies.  Proper setup is a must with any binary options trading strategy or you are only setting yourself up for failure.  If you have any questions please feel free to leave a question or comment below.

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