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Academy > Technical Analysis > What Is Momentum Oscillator: Bitcoin Day Trading Made Easy >

What Is Momentum Oscillator: Bitcoin Day Trading Made Easy

2022-08-24 05:50:32

Summary:

  • The Momentum Indicator (MOM) is a leading momentum indicator that uses n-values over a certain period based on closing prices. Momentum technical analysis measures the rate of change in the momentum of a trend.
  • Placing weight on recent data allows the MOM to send signals as they’re occurring (as with all leading indicators), making it ideal for day trading Bitcoin.
  • As there are no “overbought” or “oversold” levels on the Momentum Index, it should not be used in isolation, but combined with the RSI, StochRSI, MACD, Bollinger Bands, and other trend indicators.

 

Momentum-Oscillator

 

What Is The Momentum Oscillator?

The Momentum Oscillator is used to measure the strength of the current trend. It is a leading indicator that can be used for day trading. The indicator uses daily price closures and compares to the previous closures to measure momentum. Traders use it to identify if the rally is gaining steam or losing steam before they open long or short trades on Bitcoin (BTC).

The indicator is an oscillator-type indicator that appears below the chart and oscillates to positive and negative territory from a zero line. It is not range-bound which means the values can go up to +10,000 or vice versa depending on the timeframe. It can also be used to identify divergence. If Bitcoin is appreciating in price and the MOM oscillator is decreasing, this could indicate bearish divergence.

Compared to other momentum oscillators, it is limited in respect to identifying overbought or oversold conditions. A trader should use the MOM indicator with the Relative Strength Index (RSI) or Stochastic RSI (StochRSI) to get data about the upper and lower support/resistance levels. The indicator is most commonly used to confirm trading bias in a trending market. If the price is appreciating, a trader needs reassurance that the trend won’t reverse and the momentum will remain strong.

What Is The Momentum Oscillator Formula? 

The momentum oscillator formula is based on the closing price total divided by the closing price of an n period.

The formula is as follows:

Momentum Oscillator = (DC / DC over n period) * 100

DC stands for “Daily Close”.

The “n” period can be any period such as 10 days (the default for MOM) or any user-defined period. The formula was developed for the stock markets that have opening and closing times (9am to 5pm). In the crypto markets, trading goes on 24/7 and so we use the closing price from 00:00 UTC for the closing price.

Once we divide today’s daily close by the daily close over n periods and multiply the result times 100, we get a whole number. If the result is negative, the oscillator goes below 0 and if it’s positive it goes above 0. The range increases over longer n periods. For example, if the upper threshold is 100 for a 10-day n period, and we increase it to 100 days, the range could increase to 1,000 on the upper end.

Let’s say the price of Bitcoin is $40,000 for the daily close. If the average price of Bitcoin was $35,000 for the n period, and we divide them we get a result of 1.4 Multiplied x 100 the result is 114. This would push the oscillator into positive territory at +114 and signal a bullish momentum–which is factually correct since the price increased from $35,000 to $40,000.

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How to Use the Momentum Oscillator?

  1. The Phemex platform can be used to trade with the Momentum Oscillator indicator. To get started, we will use the BTC/USDT pair for our step-by-step guide: momentum oscillator demo 1
  2. Click “Indicators” above and search for “Momentum” to find the indicator: momentum oscillator demo 2
  3. Left-click on it and it will appear beneath the Bitcoin chart:

    momentum oscillator demo 3
    The Momentum Oscillator is the yellow line below the Bitcoin chart.

The settings for the indicator is set to 10 n periods by default. This means on the 1D (daily) chart we get an average for 10 days and on the 1W (weekly) we get an average for 10 weeks. The daily is recommended since it takes daily closing averages to calculate price movement.

How to Trade With the Momentum Oscillator? 

Day trading

An effective Momentum Oscillator day trading strategy is to go long or short based on the zero line. The indicator itself is quite limited because there are no ranges. This means it’s difficult to spot when we’re hitting a resistance level on the upper end or a support level on the lower end.

  • Buy signal: If the line ascends from negative territory and goes above the zero line, this is a buy signal.
  • Sell signal: If the line descends from positive territory and goes below the zero line, this is a sell signal.

The strategy takes patience as the indicator can oscillate above or below the zero line for a longer time. We can zoom-in on the 1D chart to find buy and sell signals and discover how the indicator performed recently:

momentum oscillator demo 4
If the line goes above 0, it is a bullish signal. If it drops below 0, it is a bearish signal.

 

The indicator predicted a sharp rise in the trend momentum when Bitcoin increased from $39,000 to $69,000 in the span of two months. It was also quite accurate for predicting other downturns, but if a trader relied on it in isolation they would be lead to multiple false signals.

Divergence Trading

The indicator can be used to identify divergence. A divergence strategy involves anticipating a trend change in advance. If the price of Bitcoin is going up, but the momentum indicator is going down, this indicates bearish divergence and we can expect a downturn. Here’s an example:

momentum oscillator demo 5
The price rise was not matched by an increase in momentum.

 

Bitcoin went up to the high $60,000s and collapsed briefly, then went back up. However, the Momentum Oscillator started going down because it didn’t identify strong momentum despite Bitcoin hitting a new all-time high at $69,000 a couple of days later. The momentum was decreasing–eventually leading to a breakdown in the price of Bitcoin over the next few months.

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How to Use Momentum Oscillator with Other Technical Indicators? 

The usage of momentum oscillators should include other technical indicators including the Moving Average Convergence Divergence (MACD), Bollinger Bands (BB), Relative Strength Index (RSI), and Stochastic RSI (StochRSI). These all identify the speed or the rate of the price change in Bitcoin.

These indicators provide insights about support and resistance levels that the Momentum Oscillator lacks. On Phemex, a trader can combine them all simultaneously. For detailed technical analysis, we merged them on the Bitcoin chart:

momentum oscillator demo 6
The world’s most popular indicators are active alongside the MOM indicator.

 

The MOM, RSI, StochRSI, MACD, and BB indicators are activated on the daily chart – each outputting a unique result. These indicators can give additional context about the upper and lower extremities we’re lacking on the Momentum Oscillator. Here’s how to understand them:

  • RSI: If the line hits the upper barrier, it is reaching overbought/resistance levels. If the line hits the lower barrier, it is hitting oversold/support levels.
  • StochRSI: Same as with RSI, but the oscillator is more volatile and moves faster.
  • MACD: If the red line moves above the blue line, it is a bearish signal. If the blue line moves above the red line, it is a bullish signal.
  • Bollinger Bands: The blue bands surrounding the Bitcoin candles indicate lower support levels where the price is likely to bounce and upper resistance levels where the price is unlikely to diverge.

The MOM indicator currently indicates bearish momentum. We can confirm this on the RSI and Bollinger Bands because the Bitcoin price is reaching support levels on both. The StochRSI indicator is showing a bearish divergence and the MACD indicator lines are separated which indicates it could go both ways. This tells us the Bitcoin price is most likely going to go down in the short term.

Conclusion

The Momentum Oscillator indicates the strength of the momentum for the current trend. While the indicator can produce buy and sell signals, it is not recommended to rely on it in isolation as it can send false signals due to the lack of range. It is therefore best used when combined with popular indicators such as RSI and MACD. If we have context about the support/resistance levels and the momentum, we can make a calculated trade easily.

The MOM is one of the simplest indicators, but it provides valuable insight for the current momentum. If the Bitcoin trend is bearish and we’re about to open a short, the indicator can confirm the momentum of the downtrend and vice versa.

To learn more about indicators you could combine with the Momentum Oscillator, visit our technical analysis section.

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