Welcome to our Free Course
Enhance your trading knowledge by studying our legendary free online program!
  • Beginner
  • Intermediate
  • Advanced
  • Completion
  1. Beginner
    Early Stages for Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
  3. Margin & Leverage
    2 Topics
  4. Personal Psychology Questions
    2 Topics
  5. Psychology for Beginners
    7 Topics
  6. Intermediate
    Identifying Scams
    2 Topics
  7. Brokers for Beginners
    5 Topics
  8. Technical Analysis
    13 Topics
  9. Market Structure
    5 Topics
  10. Completion
    Risk Management for Beginners
    8 Topics
  11. Fundamental Analysis
    9 Topics
  12. Advanced
    Using Indicators
    6 Topics
  13. Technical Analysis (Part 2)
    8 Topics

Pros and Cons of Momentum Indicators

Momentum indicators do a great job at reflecting the strength of a trend, which is very important for Forex traders. However, they have both advantages and drawbacks.

Pros:

  • All of these indicators show the strength of an uptrend or a downtrend;
  • Many of them, particularly the RSI, can accurately show overbought and oversold levels;
  • Most of them anticipate trend reversals when divergences with the currency price show up;
  • On top of being a momentum indicator, MACD is also a useful trend-following tool;
  • All indicators work well in any time frame, being suitable for both intraday and swing traders;
  • Unlike trend-following indicators, momentum indicators work well during calm markets with less volatility;
  • Unlike the majority of indicators, Stochastic’s logic is to anticipate the next price move rather than simply leveraging historical data and acting as a lagging indicator. However, it doesn’t necessarily mean the price always follows that logic.

Cons:

  • Like all indicators, momentum indicators can often provide false signals, as the price is often defying the technical analysis logic because of various reasons.
  • Since MACD relies on moving averages, it is a lagging indicator; i.e., it delivers signals as the trend develops. The rest of the momentum indicators are also lagging, except for Stochastic to a certain degree.
  • The ADX is not very reliable when used alone, as it doesn’t show the direction of the trend.

The Final Note

The great thing about momentum indicators, especially the RSI, MACD, and Stochastic, is that you can use them in several ways to get different types of confirmations. However, to get even more accurate confirmations and find the best entry or exit points, you can combine these indicators with some trend-following tools and keep an eye on volumes, which also hint at the magnitude of a price move.

Remember that while technical indicators can enhance your trading, relying on them can also have a negative impact. Focus on price action and market structure, and use them as another source of confluence to solidify your bias in the market!