Momentum

Momentum is the force gained by a moving object. Momentum is created in trading when a large number of people are agreed in which direction the price of a pair should go. It is present when the graph demonstrates decision or volatility, but it lacking in the context of indecision. It is not good to trade against the direction of a currency’s momentum, that is like trying to row upstream. The key factors that influence momentum are news and technical indicators. When news comes out, the response can be incredibly quick and the price can move a great distance. In the absence of news, traders  have to make a decision where the price should go. It may be that a line of support or resistance is fast approaching and so indecision is not an option. There may be some temporary volatility as traders dispute which way it should go, but in the end a consensus is reached and then the price will gain momentum and move with decision in a specific direction.

Momentum 

Above we can see an example of great momentum and decision. The price shoots down to the line of support against the trend and such a large drop in such a short time causes the price to rebound off of the line. However, the first large movement is an indicator of the importance of the movement. Consequently, the price penetrates the line of support and indecision is initially created as the traders express caution about the movement. Eventually the initial momentum drives the price down allbeit at a slower pace.

Momentum2

Here we can see that the price shoots up to the arrow, against the trend. The price bounces off of the line of resistance, but the momentum is such that the price breaks through the line of resistance and forms a new line significantly higher. Suddenly the downward trend becomes more of a sideways trend!

An important question to ask is how can one measure momentum? This question is beyond the scope of this page.