How to Identify Momentum When Trading in the Markets
Momentum in trading refers to the speed of price movements. You can identify it by comparing the size of candlesticks on a chart. A bigger candle shows more momentum, meaning the price moved more in that period. If candles keep getting bigger, momentum is increasing, while smaller candles and longer wicks may show momentum slowing.
How to Identify Momentum
When we talk about momentum, we’re usually referring to an acceleration in the speed of the price movements. We can identify it by looking at the candlesticks on a chart.
Take a look at this candle, the body of the candle is much bigger than the previous candle. That means the price moved further in this period, than the previous candle did. This candle had more momentum.
This could be due to some kind of data or news release that increased volatility, or could just be more selling pressure pushing the price lower.
We can’t identify momentum by looking at a single candle, we have to look at all candles relative to each other, which is why we are comparing to the previous candle, but you can also compare to the past few candles.
If we look at the next candle again, this time it’s smaller showing the momentum has slowed compared to the previous candle.
A bigger candle body means the candle has more momentum. But there is something else we also need to take into account - the size of the wick.
So looking at the above example again, the wick is also about a third of the candle, another sign that momentum is slowing.
However, if there’s barely any wick, that could suggest momentum is going to continue in the next candle, even if the candle body isn’t bigger than previous candles. Think of it like an arrow, it’s likely to shoot further in that direction. We call this a high momentum close.
This time we have a series of candles that make up the leg of a wave. The next candles keep getting slightly bigger, and shows us the momentum is increasing.
On the flip side we have another series of candles, but this time the candles keep getting smaller, and the wicks slightly longer relative to each candle. This shows the momentum is slowing.
Why Does Momentum Even Matter?
Well let’s say you’re looking at taking a trade against the current move. If the price begins to pick up momentum, that could be a sign the price is going to continue in that direction. Maybe we would want to avoid the trade or lower the amount we’re willing to risk. This is often referred to as trying to catch a falling knife.
But what about if the momentum is decreasing? In that case it could be a sign that the trend is running out of steam and the price is about to reverse.
We can’t trade momentum on its own, but it can serve as a negative filter. A negative filter is something that causes you to avoid a trade, or at least reduce your risk.