Momentum Indicator- Three Very Important Indicators You Have To Be Aware Of

Trade with the trend is the most commonly told mantra by the experienced traders. It is easier said than done. You will have to catch the trend before most traders. Once you identify the trend, you will need to find its credibility. You should make sure that it is not a fake trend by judging its strength. Momentum indicator helps you achieve just that. There are plenty of them to help you. Most commonly used indicators are CCI, RSI, and Stochastic.

Commodity Channel Index

Intended to use for commodities, now it is used with many financial instruments to spot the trend, its strength and a possible turnaround. There are many versions with many trading systems. The range is from +200 to -200. When above 100, uptrend is held and you can buy. Opposite happens for -100. Levels on either side of 100 are considered overbought and oversold. The zones beyond 200 are considered extremely overbought or oversold. 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. Up or down trend is confirmed when it crosses the levels beyond 50. Zone beyond 70 is considered overbought while that below 30 is considered oversold. As opposed to CCI, when levels are broken above 70 or below 30 instead of taking trade, you wait. Once entered into these zones, price tends to stay there for a long time. You jump into a trade when the levels of overbought or oversold are broken by going below 70 or above 30 respectively. A level of 50 is used by many traders. It is also used with trend lines. When this line follows the RSI, there is convergence. If it diverges from the RSI trend, it is a signal to a possible reversal. If you can use RSI with trend lines, you have an edge over many traders.

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 ranges from 1 to 100 and consists of fast and slow line. Zones below 20 and above 80 are critical. They are called overbought and oversold respectively. Crossing a zone is considered a reversal or just a correction. There are many ways you can use this indicator. The easiest is to sell or buy when the fast line crosses the slow line from above and below respectively. Next play is similar to RSI. Sell when the indicator comes below overbought zone and buy when it goes above oversold zone of 20. 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. You will have to spot the trend well before the masses so that you can make money with lesser risks. The weapons of indicators give you a competitive advantage over others.

Learn how to trade along with the trend in a safe manner simply by checking out HotForex review. You can also have a look at the various techniques that can be used in regards to analyzing the trend ahead of time such as day trading strategies .