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 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.

A Simplest Indicator

It was originally designed for commodities and is used for other instruments as well to determine the trend, its most and least powerful period and reversals. It has many variations each with its own trading rules. The range is from +200 to -200. It is customary to buy when it goes above 100 as the up trend is confirmed. Opposite happens for -100. Zones beyond positive and negative 100 are considered overbought and oversold conditions. 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.

Identify the Strength with RSI

Created by Welles Wilder, this momentum indicator follows the close of candles for a certain period. By default the period is 14. Play with RSI is little different from 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. 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. A level of 50 is used by many traders. Trend line can also be incorporated with this. When it is in accordance with the trend of RSI, then current trend is valid. If there is a divergence between RSI and trend line, there is a possibility of reversal of a trend. Understanding how to use RSI trend lines is a competitive advantage because you come to know about it much earlier than with just RSI.

Use Trend Line of Stochastic for Edge

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. Levels 20 and 80 are important. Zone above 80 is overbought while that below 20 is oversold. When a zone is broken, it is interpreted as reversal or correction. This indicator can be employed differently. The easiest is to sell or buy when the fast line crosses the slow line from above and below respectively. Following method has resemblance with 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. The divergence implies a correction so you can take appropriate trades.

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.

Understand how to trade with the trend in a safe manner through looking into Hot Forex review. You can also take a good understanding of the different techniques that you can use in regards to figuring out the trend early enough like for example day trading strategy .

Tags: Currency Trading, finance, investment

This entry was posted on Monday, February 20th, 2012 at 9:44 pm and is filed under Currency Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.