Strengthen Your Trading With Momentum Indicator
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You will often hear from forex experts to always trade with the trend. But this difficult task makes trading a little tricky affair. You will have to catch the trend before most traders. Once you identify the trend, you will need to find its credibility. You can avoid taking trade with the fake trend by looking at its strength. This is where momentum indicator comes into play. Many such tools are available to perform that task. Some of the prominent indicators are CCI, RSI, and Stochastic. A Simplest Indicator Intended to use for commodities, now it is used with many financial instruments to spot the trend, its strength and a possible turnaround. It has many variations each with its own trading rules. It moves from +200 to -200. When above 100, uptrend is held and you can buy. You sell when it goes below -100. Levels on either side of 100 are considered overbought and oversold. Extremely overbought and oversold zones sit beyond 200. When it enters in this territory, you are expected to close the trade. You buy or sell depending on the momentum indicator cutting the zero line and hold it till the 200 level. Relative Strength Index This momentum indicator was developed by Welles Wilder and it takes into account the close of a candle over a specific period of time. By default the period is 14. You can use RSI differently than CCI. Zones beyond 50 are considered as a confirmation of a trend up or down. Overbough and oversold levels are above 70 and below 30 respectively. Unlike CCI, you don't buy or sell when a zone crosses above 70 or below 30. Once entered into these zones, price tends to stay there for a long time. So if you want to play with RSI, you sell when RSI comes below 70 from above and buy when it goes above 30 from below. Some forex traders use the level of 50 instead of 70 and 30. Trend line can also be incorporated with this. When it is in accordance with the trend of RSI, then current trend is valid. If it diverges from the RSI trend, it is a signal to a possible reversal. Understanding how to use RSI trend lines is a competitive advantage because you come to know about it much earlier than with just RSI. Stochastic Developed by George Lane, this momentum indicator assumes that the price closes looks to close near its high or low when in uptrend or downtrend respectively. It value varies from 1 to 100 and has two lines- fast and slow lines. Levels 20 and 80 are important. Zone above 80 is overbought while that below 20 is oversold. Crossing a zone is considered a reversal or just a correction. There are many ways you can use this indicator. The simplest way is to sell when the fast line cuts the slow line from above and buy when it crosses the slow line from below. Following method has resemblance with RSI. You wait for the indicator to come below overbought zone of 80 and then sell and wait for stochastic indicator to come above oversold zone of 20 and buy. You can also use the momentum indicator to find a divergence between the currency price and the stochastic indicator. Divergence is construed as correction indicating you an appropriate trade. If used intelligently, momentum indicator can improve your success rate in trading. Making money requires getting the edge with early identification of a trend or its reversal. These indicators offer you this edge so that you can be a profitable trader.