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Market momentum is a basic concept of trading. It is the idea that an asset on the move will keep moving in the same direction, more or less, pull-backs and corrections aside. Think about it like this: a market that is trending is said to have momentum in the direction of the trend. Assets whose prices are moving higher have bullish momentum, assets whose prices are moving lower have bearish momentum.

An asset on the move tends to stay in motions whereas an asset at rest tends to remain at rest.

In a sense momentum can be said to represent the buying or selling intention of the market. When an asset begins to move that movement may be small and without much strength. If the move begins to attract more attention and more traders throw their weight into that move the asset will begin to gain momentum. As the asset prices move up/down and market participants begin to lose interest, momentum will begin to vanish. As traders we might use momentum to our advantage. Most traders recommend trading in line with the momentum (just like you would with a trend) because otherwise it can easily wipe out a trader from the market. It is worth remembering, however, that no trading strategy can yield positive results in 100% of cases, and following momentum is also not a guarantee.

MACD indicator on the IQ Option platform

There are several ways to determine market momentum. We, however, will only need one indicator. The MACD indicator is one of the top market momentum tools available. It can be found in the ‘Popular‘ tab when you click the ‘Indicators‘ button in the bottom left corner of the screen. It uses two moving averages with different periods to determine the direction and strength of the prevailing trend. Two moving averages, one long and one short, will cross above and below each other as market momentum changes. When the shorter average crosses below the longer average momentum has shifted to the downside (bearish). When the shorter average crosses above the longer average momentum has shifted to the upside (bullish).

Bullish (1) and bearish (2) crossovers

MADC stands for Moving Average Convergence Divergence. The tool determines the strength of market momentum by measuring the difference between the two moving averages. When the difference is positive, the short average is above the long average, and growing momentum is bullish and on the rise. If the difference is positive and shrinking momentum can be said to be on the wane. As complex as this sounds it is very easy to track market performance using the MACD Histogram which depicts the same information in the form of green and red bars.

If momentum is on the rise, traders can expect to see prices continue going higher or lower. If momentum is on the wane traders may expect to see the trend come to an end soon. An asset with rising momentum can be traded with the trend, an asset with waning momentum should be watched for further signs of reversal.

Two top uses for momentum and trading entries is on break-outs and continuations. On a break out prices build up momentum while trading below the resistance line or above the support line and then unleash that momentum when a support/resistance level is broken. This generally signals a flood of new money and the onset of a new trend. There are two major ways to trade such a move: short term and long term. The short term method would be to trade in the direction of the breakthrough with expiry at the end of the current candle or the very next candle. The longer term method would be to wait for the post-break pull-back to test support/resistance and trade on that signal.

MACD acts as a confirmation after a breakthrough

The second method that can be used is with continuations and trends. If an asset is trending strongly in a direction regardless of time frame, and the MACD indicator confirms rising momentum, nearer term pull backs and consolidations can be used as trend following entries.

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